:: Fourth Circuit Hears Argument Over ERISA Preemption Of Maryland “Fair Share” Legislation

For about 40 minutes in a wood-paneled courtroom overlooking the state capitol, the panel of three judges from the Court of Appeals for the 4th Circuit led by Judge Paul V. Niemeyer considered the appeal of that ruling. They needled with constant questioning an assistant Maryland attorney general defending the state and a lawyer for the Retailers Industry Leaders Association, a trade group including Wal-Mart that challenged the Maryland law.

Baltimore Sun (November 30, 2006)

Under The Fair Share Health-Care Fund Act, Md. Code Ann., Lab. & Empl. § 8.5-101, et seq. (“Fair Share Act”), non-governmental employers of 10,000 or more people that “[do] not spend up to 8% of the total wages paid to employees in the state on health insurance costs, shall pay to the Secretary an amount equal to the difference between what the employer spends for health insurance costs, and an amount equal to 8% of the total wages paid to employees in the State.”

The Maryland legislature passed the legislation in January in an override of Republican Gov. Robert Ehrlich’s veto, but the law was struck down as preempted by ERISA in Retail Leader Associate v. Fielder, (D. Md. 2006) (The Retail Industry Leaders Association is a trade group that represents Wal-Mart.)

According to a Wall Street Journal report, State Solicitor General Steven Sullivan told the appeals court that the law is part of the state’s “ongoing, long-standing efforts to address health care and skyrocketing costs of Medicaid.”

The Sun reports that Niemeyer, joined on the panel by Judges M. Blane Michael and William B. Traxler Jr., spent most of his questioning badgering Sullivan on the issue of whether federal law should trump the contested state law. The following colloquy is of interest:

At one point, Niemeyer asked hypothetically whether the state could pass a law requiring all employers to provide health care benefits for their employees and still not violate federal law. Sullivan answered yes, drawing skepticism from Niemeyer. “I don’t think you help yourself to make that argument,” the judge said.

The “Fair Share” legislation is a part of a growing trend of State activism in forcing employers to pick up the expense of medical care for the uninsured. Recent efforts in this direction were noted in a previous article on this site. The Fourth Circuit decision will be closely watched as a bellweather for whether such efforts have any spark of life outside of the broad blanket of ERISA preemption.

According to the Richmond Times-Dispatch (AP Wire), Sullivan argued that the legislation is not preempted “because it doesn’t force Wal-Mart to offer health care; it gives companies the choice of spending at least 8 percent on employee health benefits or covering the costs with increased taxes.”

The Times-Dispatch reports that Sullivan argued “They have real options; Wal-Mart knows it . . . They were trying to convince the legislature they weren’t as chintzy as their competitors were saying they were.”

RILA attorney William J. Kilberg argued that ERISA does not permit States to compel companies’ health-care spending. Since companies can opt to pay the tax, Niemeyer asked if the legislation was actually mandating benefits. In reply Kilberg stated: “It’s a Hobson’s choice, because no sane employer would make that choice” between increasing its spending and paying more taxes, Kilberg said.

Kilberg characterized the legislation as “an unprecedented, direct assault on ERISA” and, if upheld, the end of a uniform national plan as envisioned by ERISA.

Additional information is available on the RILA website.

:: Third Circuit Renders Final Decision In HMO Subrogation Case

As previously noted, the Pennsylvania Supreme Court ruled that a health maintenance organization (HMO) is exempt, by virtue of the Pennsylvania Health Maintenance Organization Act (40 P.S. § 1560(a)), from complying with the anti-subrogation provision of the Pennsylvania Motor Vehicle Financial Responsibility Law (MVFRL), 75 Pa.C.S. § 1720. See, Wirth v. Aetna U.S. Healthcare, 904 A.2d 858, 2006 WL 2408747 (Pa.) (August 22, 2006). This decision came in response to the certification of the issue to the Pennsylvania Supreme Court by the Third Circuit Court of Appeals.

Now the Third Circuit has handed down a precedential opinion incorporating that decision into its interim opinion that ERISA preempts the plaintiff’s claims. See, Wirth v. Aetna U.S. Healthcare, 2006 WL 3360457 (C.A.3 (Pa.)) (November 21, 2006).

The issue arose when Wirth, the plaintiff, received medical care through an HMO for injuries he sustained in an automobile accident. Under the HMO contract, Aetna sought reimbursement from the plaintiff’s personal injury recovery.

The HMO contract provided that “[i]f HMO provides health care benefits under this Certificate to a Member for injuries or illness for which a third party is or may be responsible, then HMO retains the right to repayment of the full cost of all benefits provided by HMO on behalf of the Member that are associated with the injury or illness for which the third party is [or may be responsible].”

Wirth, individually and on behalf of others similarly situated, contended that ERISA does not provide a civil enforcement mechanism for an action to challenge or defend against Aetna’s liens, and thus, the District Court had no jurisdiction over the matter. In the interim opinion, the Third Circuit concluded that the district court did have jurisdiction and the plaintiff’s action was properly recharacterized as a claim for benefits. The open question, now resolved by the Pennsylvania Supreme Court, was the viability of HMO subrogation provisions under the “seemingly incongruous” provisions of State law.

Reiterating the analysis in its Interim Opinion, Wirth v. Aetna U.S. Healthcare, 137 Fed.Appx. 455, 2005 WL 1355940 (3rd Cir. 2006), the Third Circuit found its decision in Levine v. United Healthcare Corp., 402 F.3d 156 (3d Cir.2005) controlling. In that case, the Court concluded that claims challenging an insurer’s claimed right of subrogation from an insured’s third party tort recovery, were within the scope of ERISA’s civil enforcement scheme and were thus completely preempted under section 502(a)(1)(B):

As we noted in our Interim Opinion, our holding in Levine applies squarely to the present facts and precludes Wirth’s argument that seeking recovery of the $2,066.90 paid to extinguish Aetna’s lien is not tantamount to seeking recovery of “benefits due” to him. Here, as in Levine, the actions undertaken by the insurer resulted in diminished benefits provided to the plaintiff insureds. That the bills and coins used to extinguish Aetna’s lien are not literally the same as those used to satisfy its obligation to cover Wirth’s injuries is of no import-“the benefits are under something of a cloud.” Arana, 338 F.3d at 438. For these reasons, we reiterate the holding of our Interim Opinion: Wirth’s claims against Aetna are completely preempted by ERISA and there was no error in the District Court’s conclusion that it had jurisdiction over this matter.

Note: By way of background, it is helpful to note that the Levine opinion relied upon in Wirth approached the HMO subrogation issue by reference to the Third Circuit’s prior decision in Pryzbowski v. U.S. Healthcare Inc., 245 F.3d 266, 268 (3d Cir.2001). Applying Pegram v. Herdrich, 530 U.S. 211, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000), that decision designated two categories of ERISA cases: 1) where the claim challenges the administration of, or eligibility for, benefits, which are preempted, and 2) those challenging the quality of medical treatment, which are not preempted). In both Levine (New Jersey HMO) and, now Wirth (Pennsylvania HMO), the Third Circuit has opined that challenges to HMO subrogation rights, while not fitting exacting in either category, “are more like challenges to the ‘administration of benefits’ than challenges to the ‘quality of benefits received.’”

This position, as noted by the Court comports with decisions in the Fourth and Fifth Circuit Court of Appeals. See, Singh v. Prudential Health Care Plan Inc., 335 F.3d 278 (4th Cir.2003); Arana v. Ochsner, 338 F.3d 433, 437 (5th Cir.2003) (en banc).

The issue of HMO subrogation can appear somewhat complex because it involves application of the “savings” clause of ERISA. These cases must be distinguished from self-funded health plan subrogation cases.

With HMO subrogation cases, the participant’s array of remedies are constrained by ERISA Section 502(a), though the plan terms are determined by State law. In the words of the Fourth Circuit:

Because we conclude that the subrogation prohibition of the Maryland HMO Act does not supplement or supplant ERISA’s exclusive remedies by creating a “prohibited alternative remedy,” Rush, 536 U.S. at 379, 122 S.Ct. 2151, it remains “saved” and therefore “supplies the relevant rule of decision” in a § 502(a) claim to enforce the provision of State law . . . A State law preserved as a regulation of insurance under § 514(b)(2)(A) may supply a substantive term or mandate a benefit in an employee benefit plan, but once that term or benefit becomes part of the plan, a suit to enforce it may only be brought under § 502(a). In such a suit to enforce the terms of the plan, the State law merely operates to define the benefits that may be enforced under § 502(a). See Fink v. Dakotacare, 324 F.3d 685, 689 (8th Cir.2003) (recognizing “the distinction between a substantive state insurance law, which if saved will provide‘a relevant rule of decision’ in an ERISA civil enforcement action, and a state judicial remedy, which is conflict-preempted under Pilot Life even if it was created or authorized by a state insurance statute” . . .

Singh v. Prudential Health Care Plan Inc.

The issue would not arise for a self-funded group health plan inasmuch as the “deemer” clause prohibits application of any State insurance law to such plans. See, FMC Corp. v. Holliday, 498 U.S. 52, 61, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990) (ERISA preempted application of Pennsylvania Motor Vehicle Financial Responsibility Law to employer’s self-funded health care plan – plan cannot be “deemed” insurer for purposes of the statute)

:: Tenth Circuit Opinion Creates Split In Circuits In Standard of Review Decision

The majority’s holding, which is in effect that any act authorized by a party vested with discretion must be reviewed with deference, is contrary to-rather than dictated by-the common law of trusts, is contrary to the manifest intent of Congress for ERISA plans to be administered by a fiduciary, and creates a circuit split by adopting its unprecedented holding . . . The majority’s analysis is critically flawed because its underpinning is the unsupported assumption that “discretion was exercised by some combination of the fiduciary and its agent.”

Circuit Judge Holloway, concurring in part, dissenting in part, Geddes v. United Staffing Alliance Employee Medical Plan, — F.3d —-, 2006 WL 3307262 (C.A.10 (Utah)) (November 15, 2006)

In an important Tenth Circuit decision, the issue arose as to the proper standard of review to apply when a plan administrator delegates authority to a non-fiduciary third party claims administrator. In disagreement with the Eleventh Circuit Court of Appeals, the Tenth Circuit finds that delegation does not trigger de novo review.

Description of Treatment

Andrew Geddes severely injured his spinal cord on a church-sponsored lake trip in Utah. His injuries included such damage to his neck and spinal column that he had to be fed intravenously. Given his fragile condition, the treating physicians recommended he be transferred to Primary Children’s Hospital by helicopter.

Andrew’s only health coverage was under his parents’ health plan through United Staffing Alliance. The plan denied this form of transportation. Thus, Andrew had to be driven five hours from Grand Junction to Salt Lake City by ground ambulance. Upon arrival he was admitted to the neuroscience ward.

Physicians at Primary Children’s hospital diagnosed Andrew with a “C-4 asia class C spinal” injury complicated by a urinary tract infection. They recommended two months of rehabilitation, bowel and bladder treatment, medication was undertaken until Andrew’s discharge on September 10, 2002.

Denial of Coverage

Before addressing the denial of coverage, a brief overview of the health benefits arrangement provided through United Staffing will be helpful.

Under the plan document, United Staffing served as both fiduciary and administrator, with Everest Administrators, Inc., serving as third party administrator. Everest Administrators furnished a network of medical care providers to offer services to plan participants at “discounted contract prices”. The Plan also covered care given by out-of-network providers at the “usual and customary rate as determined by the Plan”.

The plan administrator’s denial of the recommended air transportation for Andrew was a harbinger of things to come. United Staffing ultimately covered only $40,921 of Andrew’s $185,892 in medical bills.

The exchange of claims and denials leading to the district court case are succinctly described as follows:

United paid less than half of the cost of Andrew’s treatment at St. Mary’s Hospital on the ground that the hospital’s charges exceeded the “usual and customary” rate covered by the Plan. United denied almost all of Andrew’s claims arising from his stay at Primary Children’s Hospital in Salt Lake City as well, contending Andrew’s treatment there amounted to rehabilitation, for which the Plan imposed a $2,500 cap. In a series of letters and phone calls exchanged with Everest and Intracorp, another claims review agency employed by United Staffing, Andrew’s parents disputed both United’s interpretation of “usual and customary” and its characterization of their son’s treatment as “rehabilitative”. United Staffing insists the Plan gives it wide discretion as Plan administrator and fiduciary to interpret the document’s terms. And while Everest professed in a letter to the Geddeses’ attorney to “completely agree that the rehabilitation care was medically necessary,” it stood by its denial of benefits based on the terms of the Plan.

The District Court Decision

Andrew’s parents filed suit against the United Staffing and Everest Administrators in federal district court, asserting (1) the denial of benefits was improper under ERISA § 502(a)(1)(B) and (a)(3) and (2) the plan administrator breached its fiduciary duty in violation of ERISA § 404(a) and 502(a)(3), and (3) a violation of § 502(c)(1)(B) due to the Defendants’ failure to provide requested Plan documents.

On cross motions for summary judgment, the district court granted the plaintiffs summary judgment on their claim for benefits, but ruled for the defendants on the breach of fiduciary duty and failure to provide plan information claims. The district court applied a de novo standard of review in reaching its decision.

The Tenth Circuit Decision

On appeal to the Tenth Circuit, United Staffing and Everest Administrators presented several arguments. Among other things, they contended that the district court applied the incorrect standard of review, relied on extrinsic evidence beyond the administrative record, misinterpreted Plan provisions, and failed to properly consider the administrator’s pre-certification argument.

The crux of the case consisted of the proper standard of review. The plan contained the requisite delegation of authority under Firestone, but the district court viewed the case as an instance in which the administrator had failed to exercise its authority. On this view, the court applied the rule set forth in Gilbertson v. Allied Signal Inc., 328 F.3d 625 (10th Cir.2003) (plan administrator must actually exercise the discretion the Firestone language confers in order to enjoy deferential review of its decisions)

In Gilbertson, the plan administrator failed to render a decision on a disability claim prior to the deadline, leading to the claim being “deemed denied” pursuant to ERISA regulations. The Tenth Circuit held “when substantial violations of ERISA deadlines result in the claim’s being automatically denied on review, the district court must review the denial de novo, even if the plan administrator has discretionary authority to decide claims. . . Deference to the administrator’s expertise is inapplicable where the administrator has failed to apply his expertise to a particular decision.

The Tenth Circuit rejected the district court’s analogy, however, stating:

On the court’s logic, the party to which a plan fiduciary or administrator delegates the responsibility to review claims must also be a fiduciary. If the administrator delegates responsibility to a non-fiduciary, the court reasoned, the plan effectively has no fiduciary exercising the sort of discretion that qualifies for Firestone deference. Therefore, United Staffing may not both claim judicial deference and delegate responsibility for claims administration to Everest, because Everest is an independent third party-that is, not itself a fiduciary under the Plan. That Everest, on behalf of United Staffing, handled every claim submitted by the Geddeses led the district court to conclude that United Staffing effectively did nothing, totally failing for purposes of the ERISA statute and Gilbertson to exercise its discretion and thereby forfeiting its claim to deferential review. We cannot agree with this logic . . .

The Tenth Circuit viewed the district court’s logic as refuted by the “plain language” of the statute which provides “for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities . . . under the plan.” See, 29 U.S.C. § 1105(c)(1) (emphasis added). Thus, the Court held that the statute “endorses the delegation to non-fiduciary third parties the district court found suspect.”

Moreover, the Court noted that Firestone does not limit the parties to whom a fiduciary may delegate its authority, beyond those limits implicit in the principles of trust law. Applying trust law principles, “while a fiduciary may not delegate the entire administration of his trust absent specific authorizing language in the trust instrument, a fiduciary may delegate the performance of certain tasks “which it is unreasonable to require him personally to perform.” Thus, trust law does not require a fiduciary to delegate his authority only to other fiduciaries.

Note: The Tenth Circuit distinguished its holding in Gilbertson in that Everest Administrators “made a benefits determination according to the procedures of the Plan, which United, as the Plan fiduciary, then accepted. Thus, unlike in Gilbertson, discretion was exercised by some combination of the fiduciary and its agent.” The case leaves open the question of what factual showing may lead to a conclusion that the necessary plan authorization and protocol are lacking.

Also, the Tenth Circuit recognized that the Eleventh Circuit has come to a different conclusion on its view of delegation of authority by plan administrators:

We are aware of at least one circuit that disagrees with our conclusion. In Baker v. Big Star Div. of the Grand Union Co., 893 F.2d 288 (11th Cir.1990), the Eleventh Circuit held that in order to qualify for Firestone deference, an ERISA plan administrator that delegates its authority must do so only to other fiduciaries. Id. at 291. The Eleventh Circuit’s logic parallels the district court’s in our case. “[A]ny entity or person found not to be an ERISA ‘fiduciary’ cannot be an ‘administrator with discretionary authority’ subject to the arbitrary and capricious standard.”

Dissenting from this portion of the opinion, Justice Holloway provided a well-reasoned analysis of the implications of the majority’s opinion.

For the sake of completeness, note that the Tenth Circuit ultimately found the defendants’ application of the “usual and customary” definition to be arbitrary and capricious, having “the effect of misleading Plan members and denying them necessary medical coverage” in that it ignored the “prevailing market rate”.On the other hand, the issue of the extent to which claims were excluded as “rehabilitative” was remanded for consideration on the closed administrative record under an arbitrary and capricious standard of review. The decision against Everest Administrators was reversed in that “no circuit holds that a non-fiduciary such as Everest is liable under the terms of 29 U.S.C. § 1132(d)(2)”.

:: ERISA Plan Information Requests (Unit 4): “Who Is Entitled To Request Plan Information?”

This article continues a discussion began in Unit 3 as to the persons entitled to request plan information under 29 U.S.C. 1024(b)(4).

To maintain a frame of reference, the pertinent portion of the statute reads:

The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated.

Having addressed what plan information is subject to the statute in Units 1 and 2, we began in Unit 3 a tripartite treatment of the question who can request plan information.

The definition of participant or beneficiary only begins the inquiry since third parties often request information on their behalf. Is this permissible under Section 1024(b)(4)?

The discussion must start with reference to Department of Labor Advisory Opinion 82-021A since it has provided the occasion for a split in the circuit courts on the issue. The DOL letter provides in pertinent part:

[I]f information is required to be furnished to a participant or beneficiary under section 104(b)(4) [29 U.S.C. § 1024(b)(4) ], the information must also be furnished to a third party where the participant or beneficiary has authorized in writing the release of the information to such third party. Absent such authorization, it is the Department’s view that a plan is not required by section 104 of ERISA to provide such information to persons who are neither participants nor beneficiaries.

DOL Advisory Opinion Letter 82-021A

Based upon the foregoing letter, the Sixth Circuit Court of Appeals has held that, absent written authorization by the plan participant or beneficiary, a written request for plan documents by an attorney does not trigger a duty of disclosure. See, Bartling v. Fruehauf Corp., 29 F.3d 1062, 1072 (6th Cir. 1994).

On the other hand, the Third and Tenth Circuit Courts of Appeal have held that a written request by an attorney representing a plan participant or beneficiary does trigger a duty of disclosure by the plan administrator. See, Daniels v. Thomas & Betts Corp., 29 F.3d 66, 77 (3d Cir. 2001); Moothart v. Bell, 21 F.3d 1499, 1503 (10th Cir. 1994).

The Sixth Circuit Deference To DOL Advisory Opinion Letter 82-021A

In Bartling v. Fruehauf, the Sixth Circuit noted “a long history of authority recognizing that attorneys generally have the authority to act on their clients’ behalf without written authorization”, citing Hill v. Mendenhall, 88 U.S. (21 Wall.) 453, 454, 22 L.Ed. 616 (1875) (“When an attorney of a court of record appears in an action for one of the parties, his authority, in the absence of any proof to the contrary, will be presumed.”)

Nonetheless, the Court stated:

While we acknowledge the force of Plaintiffs’ argument, we must keep in mind that, in interpreting § 1024(b)(4), we are obliged to accord great deference to DOL interpretations . . . The plain language of the DOL Advisory Opinion Letter refers broadly to all “persons who are neither participants nor beneficiaries”; it does not exempt attorneys. We can find no compelling indication that the DOL’s Advisory Opinion is incorrect. In a matter of statutory interpretation such as this, our traditional recognition of attorneys’ authority to represent their clients must yield to the DOL’s interpretation of § 1024(b)(4). (citations omitted)

The Third Circuit accepted the distinction urged by the plaintiffs in Bartling v. Fruehauf, however, stating:

While we agree with [the advisory opinion] as applied to non-attorney third parties, we believe an attorney’s representation regarding the authority conferred upon him or her by the client adds a material factor not present in the situation the Department was addressing. The law has traditionally accepted such representations in the absence of reason to question them, and the statutory objective behind § 1024(b)(4) counsels in favor of accepting them here. For this reason, we respectfully disagree with the conclusion reached by the Sixth Circuit Court of Appeals in Bartling. See Moothart v. Bell, 21 F.3d 1499, 1503-04 (10th Cir.1994) (recognizing an attorney’s letter similar in all material respects to that of Mrs. Daniels’ attorney as constituting a “request” under the statute and triggering a duty to respond).

Accord: Adkins v. Bell Atlantic Corp., 2000 WL 1728368 (D.Del. 2000). See also, Porcellini v. Strassheim Printing Co. Inc., 578 F.Supp. 605, 611 (E.D.Pa.1983); Curry v. Contract Fabricators, Inc. Profit Sharing Plan, 744 F.Supp. 1061, 1066 (M.D.Ala.1988), aff’d, 891 F.2d 842 (11th Cir. 1990).

The Sixth Circuit Revisits The Issue

In Minadeo v. ICI Paints, 398 F.3d 751 (6th Cir. 2005), the Sixth Circuit retreated substantially from its earlier position. The Court stated that plan administrators may not simply ignore requests for plan information by attorneys.

In contrast to the behavior of the defendant in Bartling, Glidden’s handling of the request by Murphy’s attorney for benefits information to which she was entitled under ERISA and which was expressly made on her behalf and pursuant to ERISA, can only be described as entirely inappropriate. Glidden did not inform Murphy’s attorney that the information would not be provided without a signed authorization; rather, it simply ignored the request for almost four months. Pension plan administrators who treat our decision in Bartling as a license to simply disregard a written request for pension benefits information if it is made by a participant’s attorney, rather than by a participant herself, both misconstrue the holding of that case and misunderstand their obligations under ERISA. Again, ERISA disclosure requirements exist to help ensure that participants have access to information about their pension plans. As the Third Circuit has cogently observed, “the objective of [the ERISA disclosure requirements] would be ill served … by permitting administrators to refuse to respond with no indication that authori[zation from the participant] is even an issue.” Daniels v. Thomas & Betts Corp., 263 F.3d 66, 77 (3rd Cir.2001).

Thus, as in the case of determinations of the scope of what information is subject to the disclosure requirement, the perception of bad faith can influence the decision as to who may request plan information. The Sixth Circuit thus clarified its earlier opinion as follows:

What Bartling says is that a plan administrator may require written authorization from a plan participant before satisfying a non-participant’s request for benefits information. Not inconsistent with that rule, we hold that a plan administrator is not entitled to ignore a request for pension benefits information made by an attorney on behalf of a participant, as Glidden did in this case for almost four months. Instead, a plan administrator must either provide the requested information directly to the plan beneficiary (we note that this option would have made a great deal of sense in the present case, as Murphy herself had first repeatedly requested the information by telephone before enlisting the aid of an attorney), or must act as the defendant in Bartling did, and inform the attorney that the information will be released upon the receipt of an authorization signed by the plan participant. A plan administrator who fails to take either of these steps within the thirty day period imposed by 29 U.S.C. § 1132(c) is subject to the fines authorized by that same provision, at the discretion of the district court.

Other than in the case of attorneys, however, it seems that requests by third parties will not trigger the disclosure requirement absent written authorization. As an aside, it would appear that, under the law of agency, others authorized to act on behalf of a plan participant or beneficiary should logically be permitted to do so under Section 1024(b)(4) (cf., IRS Circular 230) but that is not the law.

Practice Considerations

Even in the case of attorneys making requests for plan participants or beneficiaries, the better practice is to have the requests made by the participant or beneficiary. One way to accomplish this objective would be to draft a letter and simply include a statement to be signed by the participant or beneficiary at the bottom of the page.

While no one approach is necessarily best, it would seem acceptable to attach a statement such as:

I, John Doe, have read the request for plan information described above and pursuant to 29 U.S.C. 1024(b)(4) and the terms of the ______ group health plan, make this request as provided in the statute for the described plan information. Further, I direct this information be sent to my attorney, Jane Smith, Esq. and any questions as to the preparation or delivery of such documents be directed to her. /s/ John Doe

With the advent of medical privacy laws, plan administrators may still raise authorization issues, though in most cases, plan information requests will not involve protected health information. If such objections are anticipated, a good practice would be to include an authorization as to PHI as well.

Can one authorization serve for multiple requests? Perhaps so, but following the practice described above would be best in each instance so as to remove doubt.

From the standpoint of the plan administrator, requests by third parties, if objectionable, should be met with an explanation of what is needed. Providing an authorization form, or at least offering to do so, would show good faith. Moreover, once an indication of legal representation is provided, the plan administrator would be wise to cooperate in providing plan information. Most jurisdictions, including the Sixth Circuit in some instances, will view such requests as triggering the disclosure obligation.

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:: Fourth Circuit Interprets “Accident” As Excluding Coverage For Intoxicated Driver’s Death

What is an accident? Everyone knows what an accident is until the word comes up in court. Then it becomes a mysterious phenomenon, and, in order to resolve the enigma, witnesses are summoned, experts testify, lawyers argue, treatises are consulted and even when a conclave of twelve world-knowledgeable individuals agree as to whether a certain set of facts made out an accident, the question may not yet be settled, and it must be reheard in an appellate court.” Justice Musmanno, Brenneman v. St. Paul Fire and Marine Ins. Co., 411 Pa. 409, 192 A.2d 745, 747 (1963)

“There is no doubt that Mr. Eckelberry’s impaired condition could have contributed to the cause of the collision. One of the chief goals of accident insurance, however, is to protect insureds from the effects of their own acts . . . Even if an accident results because of the insured’s own fault, the insured still expects to receive coverage . . . Otherwise, insurers could deny almost any claim under any accident insurance policy on the grounds that the insured contributed to the resulting accident. Having accident insurance would become as useful as socks for fish.” United States District Court Judge Joseph Robert Goodwin, Eckelberry v. ReliaStar Life Ins. Co., 402 F.Supp.2d 704 (S.D.W.Va.,2005), rev’d, 2006 WL 3333747 C.A.4 (W.Va.) (November 17, 2006)

Around 3:49 a.m. on March 19, 2004, Earl Eckelberry died in an automobile accident when he struck a tractor trailer parked on the side of the road. His blood-alcohol level was
determined to be 0.15%.

Earl had accidental death and dismemberment (AD & D) insurance of $86,000 through his employer’s employee benefit plan. ReliaStar Life Insurance Company, was the
exclusive administrator of the AD & D plan, and in that capacity denied Michele Eckelberry’s claim for death benefits.

ReliaStar contended that Earl’s death was not an “accident”. The AD & D plan provided that “ReliaStar Life pays this benefit if you lose your life . . . due to an accident” which it defined as “an unexpected and sudden event which the insured does not foresee.”

ReliaStar explained that Earl’s death was “not unexpected” since he “put himself in a position in which he should have known serious injury or death could occur.”

After ReliaStar’s Appeals Committee affirmed the benefits denial, Michele Eckelberry sued in State court. ReliStar removed the case to federal court upon federal question
jurisdiction.

The District Court Rules For Claimant

The district court, applying a modified abuse of discretion standard, reversed the ReliaStar’s benefit denial on the basis that it was unreasonable. The opinion provides a detailed discussion of the judicial travails stemming from attempts to reduce the metaphysical notion of accident into a workable legal definition.

First, the district court noted that “[i]n reality, few accident insurers attempt the creation of a definition for accident.” “The occasional effort typically results in failure. In this case,
ReliaStar defines ‘accident’ and consequently attempts to navigate the treacherous strait that has doomed other accident insurers.”

- Interpretation At Odds With Actual Words Used In The Policy

The district court held that the interpretation used by ReliaStar was at odds with the actual words used in the policy.

“The court finds that Mr. Eckelberry’s crash was unexpected, constituted a sudden event, and was not foreseen by Mr. Eckelberry. Therefore, Mr. Eckelberry’s crash was an accident as defined by the clear-cut language of ReliaStar’s policy. ReliaStar, however, by reasoning that Mr. Eckelberry “put himself in a position in which he should have known serious injury or death could occur” reads an objective component of foreseeability into the definition. The actual definition in the policy does not contain this objective component. Because ReliaStar’s interpretation requires implying a requirement that is not specified by the plain, ordinary meaning of the words used in the plan’s definition, the first factor weighs in favor of a finding that ReliaStar’s interpretation of the plan was not reasonable.”

- Interpretation Inconsistent With Federal Common Law Meaning of “Accident”

The district court also found the definition used in ReliaStar’s plan was inconsistent with the true definition of an accident. Given the general agreement among federal courts that the word “accident” lacks an ordinary meaning, the Court turned to the test employed by the First Circuit in the seminal decision Wickman v. Northwestern National Insurance Company, a case described as the “primary embodiment of federal common law in the area of accidental death benefits.” See, Bevans v. Iron Workers’ Tri-State Welfare Plan, 971 F.Supp. 357, 361 (C.D.Ill.1997).

In Wickman, the ERISA plan’s accidental death provisions defined accident as “an unexpected, external, violent, and sudden event.” As explained by the district court, under Wickman, the court first attempts to determine the insured’s actual expectations. If there is insufficient evidence to determine the insured’s subjective expectations, then the court must determine whether a reasonable person similarly situated to the insured “would have viewed the injury as highly likely to occur as a result of the insured’s intentional conduct.”

The district court found fault with the typical application of Wickman, stating:

Courts addressing whether deaths or injuries involving intoxicated drivers constitute accidents almost always state they are following Wickman’s analysis. These courts, however, routinely fail to apply the two-step test properly, either by skipping step one entirely or by misstating step two. When reviewing a plan that defines “accident” not in accordance with its generally understood meaning, the court will use the Wickman two-step analysis to determine if a death or injury results from an accident.

In the district court’s view, ReliaStar’s focus on whether the insured “put himself in a position in which he should have known serious injury or death could occur” did not follow Wickman’s two-step test.

ReliaStar skipped step one entirely by failing to examine foreseeability through the eyes of the insured as the common law requires. Instead, ReliaStar examined foreseeability only through the eyes of ReliaStar. In the letter denying Mrs. Eckelberry’s appeal. ReliaStar explained, “We believe that an individual driving with a blood alcohol level above the legal limit knowingly puts themselves at risk for serious injury or death.” This interpretation fails to comport with the federal common-law definition of “accident” as formulated by Wickman. Therefore, this interpretation is at odds with the substantive requirements of ERISA.

More About Wickman

Given the canon-like authority accorded the Wickman case, some examination of the case is useful background. In Wickman, the insured climbed over a guardrail and fell to his death. The court determined that his death was not an accident.

In reaching this conclusion, the court rejected the argument by the insurance claimant that, unless the decedent committed suicide, the event must be termed an accident.

The Court stated that the benefit provisions of an ERISA regulated group life insurance program must be interpreted under principles of federal substantive law. The federal common law on the issue of insurance benefits “must embody common-sense canons of contract interpretation.”

Finding it appropriate to consider State law in developing federal common law, the Court stated:

“Applying the basic tenets of contract interpretation, the first place to look for a definition is in the terms of the policy contract itself. These terms must be given their plain meanings, meanings which comport with the interpretations given by the average person. Courts have also held, nearly unanimously, “that insurance contracts must be liberally construed in favor of a policyholder or beneficiary ··· and strictly construed against the insurer in order to afford the protection which the insured was endeavoring to secure when he applied for the insurance.”

To the extent that the definition of accident requires evaluation of the unexpected nature of an event, the Wickman court noted two difficulties in applying a purely subjective test to determine expections.

The first difficulty comes in cases where an insured’s expectations are patently unreasonable. The second difficulty with a test relying upon actual expectation is that actual expectation is often difficult, if not impossible, to determine.

Nonetheless, the Wickman Court did not suggest actual expectation should be wholly ignored:

. . . for in most cases actual expectations govern the risks of an insurance policy a beneficiary believes has been purchased. Generally, insureds purchase accident insurance for the very purpose of obtaining protection from their own miscalculations and misjudgments . . . Thus, the reasonable expectations of the insured when the policy was purchased is the proper starting point for a determination of whether an injury was accidental under its terms.

Then, the Wickman Court stated what has become the litmus test under the federal common law of ERISA:

If the fact-finder determines that the insured did not expect an injury similar in type or kind to that suffered, the fact-finder must then examine whether the suppositions which underlay that expectation were reasonable. This analysis will prevent unrealistic expectations from undermining the purpose of accident insurance. If the fact-finder determines that the suppositions were unreasonable, then the injuries shall be deemed not accidental. The determination of what suppositions are unreasonable should be made from the perspective of the insured, allowing the insured a great deal of latitude and taking into account the insured’s personal characteristics and experiences.

The Fourth Circuit Applies Wickman To Reverse

The Fourth Circuit began by oberving that in Baker v. Provident Life & Accident Insurance Co., 171 F.3d 939, 942-43 (4th Cir.1999), it suggested that it would apply the Wickman test to drunk driving collisions. As in Wickman, the Court found no evidence in the administrative record from which “the insured’s subjective expectation” could be “accurately determined.”

Thus, again as in Wickman, we proceed to the “objective analysis,” and consider “whether a reasonable person, with background and characteristics similar to the insured, would have viewed the injury as highly likely to occur as a result of the insured’s intentional conduct.”

The Court held that ReliaStar was entitled to take into account the “substantial criminal consequences that attach to an insured’s decision to drive while intoxicated.” The Court went on to observe that “[t]hese criminal laws stem, in part, from the fact that driving under the influence threatens not only the life of the impaired driver, but also the lives of other motorists.”

The Court’s reasoning is reflected in the following quote:

In sum, we are hard pressed to say that a death must be deemed accidental where a decedent voluntarily gets behind the wheel after voluntarily drinking too much. By choosing to drive under circumstances where his vision, motor control, and judgment were likely to be impaired, the insured placed himself and fellow motorists in harm’s way. To characterize harm flowing from such behavior as merely “accidental” diminishes the personal responsibility that state laws and the rules of the road require. This case, in short, affords us no basis for concluding that ReliaStar’s denial of benefits was unreasonable.

Implications of Eckelberry

Eckelberry finds support in its outcome from a number of cases although the Eckelberry’s blood alcohol content was the lowest of any of the cited cases. The remarkable aspect of the case lies in its use of State traffic laws and public policy in assessing the insured’s reasonable expectations.

In fact, ReliaStar contended that “it is well settled in the Fourth Circuit that an intoxicated driver’s death can never be an accident”, citing Baker v. Provident Life & Accident Insurance Company, 171 F.3d 939, 941 (4th Cir.1999) (drinking and driving was voluntary participation in involuntary manslaughter that precluded health insurance benefits). [See discussion on health plan exclusions here.] Incidentally, as in Baker, Justice Wilkerson wrote the Eckelberry opinion in which he was joined by Justice Traxler.

The Fourth Circuit disclaimed that view, however, stating

“[t]he simple fact that drunk driving occurred does not mean there was no accident under the policy. If the insurer did not intend to cover any injury to a drunk driver, then drunk driving would have been a specific exclusion listed in the plan. Rather, ReliaStar’s determination that “Eckelberry’s death was not unexpected because he put himself in a position in which he should have known serious injury or death could occur” finds considerable support in the record.

Yet, the Court’s reflection on West Virginia criminal statutes in reaching its decision raises the question of what BAC level the Court would permit under its view of what constitutes an accident. Are violations of traffic laws to be considered presumptively negligent, and if so, indicia of a “voluntary” act?

In short, the Court’s ruling suggests an implicit negligence standard in the definition of “accident” that could encompass a broad range of activities. The Court itself seemed to sense this implication, stating:

We do not suggest that plan administrators can routinely deny coverage to insureds who engage in purely negligent conduct or, for example, to anyone that speeds. In fact, accident insurance is often purchased to cover negligence at its most typical: Insureds seek “protection from their own miscalculations and misjudgments.” Wickman, 908 F.2d at 1088 (citations omitted). In this regard, the district court’s comparison of those who drive drunk to those who apply lipstick, fiddle with the radio dial, or restrain a child is inapt. See Eckelberry, 402 F.Supp.2d at 712. While these actions are hardly commendable driving habits, they do not generally rise to the level of crimes. Indeed, even though acts like speeding and (in some jurisdictions) driving while talking on a cellular phone are illegal, none compare to driving while drunk, which has long been “widely known and widely publicized” to be both illegal and highly dangerous.

Based upon the Court’s “reasonable person” standard, there seems little reason to treat an intoxicated insured differently than one who breaks the law by driving with excessive speed. In fact, using the reasonable person/public policy rationale, a case can be made for denying accident benefits to an insured that is driving while tired, without a seatbelt, or with underinflated or worn tires. In sum, the Court’s rationale does not support its apparent desire for a more limited conclusion.

One might reasonably expect litigation to develop along these lines as the federal courts are drawn further into the quagmire of assessing what life events are sufficiently devoid of voluntary action to constitute an accident. To be sure, policies and plan documents may be written to exclude such events (in which case the list would presumably be contained in an SPD) – but is it the role of federal courts to write these exclusions into the definition of an accident?

By making the issue one of accident definition, the federal courts have through development of the “federal common law” shifted a traditional policy exclusion issue, and thereby, the burden of proof, to that of the claimant. Cf., Lardydell v. Union Fidelity Life Ins. Co., 2006 WL 3069659 (N.D.Ind.) (October 25, 2006) (Under Indiana law, the existence of an exclusion from coverage is an affirmative defense on which the insurer bears the burden of proof)

As the Wickman court noted, actual expectation is often difficult, if not impossible, to determine. Nonetheless, Wickman requires that “the determination of what suppositions are unreasonable should be made from the perspective of the insured, allowing the insured a great deal of latitude and taking into account the insured’s personal characteristics and experiences.” By limiting review to the administrative record, federal courts rarely can complete the analysis of the insured’s expectations as intended by the First Circuit in Wickman. Moreover, the Fourth Circuit shows a lack of consistency by permitting the administrator to incorporate public policy considerations in its decisions – information clearly beyond the administrative record.

The irony of the Fourth Circuit’s approach is that when decisions are only reviewed based on an objective reasonable person standard, then no negligent individual, much less one with impaired judgment, would ever logically be entitled to recover accident benefits. Such limitations have traditionally come by way of specific policy exclusions, but federal courts have imported the restriction into the very definition of an insurable event.

In the final analysis, the Fourth Circuit’s rigid application of the objective aspect of the Wickman test takes the federal courts still closer to the discredited “accidental means” requirement of Landress v. Phoenix Mutual Life Ins. Co., 291 U.S. 491, 54 S.Ct. 461, 78 L.Ed. 934 (1934). (golfer’s death from heatstroke not an accident since he chose to play golf in the sun all day). Justice Cardozo dissented from that opinion, stating that the artificial test would plunge this area of the law into the proverbial Serbonian bog. (“When a man has died in such a way that his death is spoken of as an accident, he has died because of an accident, and hence by accidental means.”) The Fourth Circuit’s reasonable person/public policy assessment of an insured’s expectations places the ERISA common law on a similar route.

Research Note:

Cases Applying Wickman test -

See, e.g., Cozzie v. Metro. Life Ins. Co., 140 F.3d 1104, 1109-10 (7th Cir.1998); Weatherall v. ReliaStar Life Ins. Co., 398 F.Supp.2d 918, 924 (W.D.Wis.2005); Mullaney v. Aetna U.S. Healthcare, 103 F.Supp.2d 486, 494 (D.R.I.2000); Sorrells v. Sun Life Assurance Co., 85 F.Supp.2d 1221, 1232-35 (S.D.Ala.2000); Walker v. Metro. Life Ins. Co., 24 F.Supp.2d 775, 782 (E.D.Mich.1997); Schultz v. Metro. Life Ins. Co., 994 F.Supp. 1419, 1422 (M.D.Fla.1997); Nelson v. Sun Life Assurance Co., 962 F.Supp. 1010, 1012 (W.D.Mich.1997); Miller v. Auto-Alliance Int’l, Inc., 953 F.Supp. 172, 176-77 (E.D.Mich.1997); Cates v. Metro. Life Ins. Co., 14 F.Supp.2d 1024, 1027 (E.D.Tenn.1996), aff’d, 149 F.3d 1182 (6th Cir.1998); Fowler v. Metro. Life Ins. Co., 938 F.Supp. 476, 480 (W.D.Tenn.1996).

Highly Likely Formulation -

Courts have used a number of different formulations to describe the objective portion of the Wickman inquiry. The following are best classified as requiring a standard akin to “highly likely.” See, e.g., Padfield v. AIG Life Ins. Co., 290 F.3d 1121, 1127 (9th Cir.2002) (holding insured’s death by autoerotic asphyxiation was “accidental” because a reasonable person would not have viewed death as “substantially certain” to result); Todd v. AIG Life Ins. Co., 47 F.3d 1448, 1456 (5th Cir.1995) (same); Walker v. Metro. Life Ins. Co., 24 F.Supp.2d 775, 782 (E.D.Mich.1997) (holding insured’s drunk driving death was not “accidental” because a reasonable person would have viewed serious injury or death as “highly likely to result”); see also Wickman, 908 F.2d at 1080, 1088-89 (holding insured’s death by forty foot fall was not “accidental” because a reasonable person “would have viewed the injury as highly likely to occur as a result of the insured’s intentional conduct”).

Reasonably Foreseeable Formulation -

See Cozzie v. Metro. Life Ins. Co., 140 F.3d 1104, 1109-10 (7th Cir.1998) (upholding plan administrator’s interpretation of “accident” as an event that is not “reasonably foreseeable”); see also King v. Hartford Life & Accident Ins. Co., 414 F.3d 994, 1002 (8th Cir.2005) (discussing objective standard in terms of both reasonable foreseeability and high likelihood); Jones v. Metro. Life Ins. Co., 385 F.3d 654, 665 (6th Cir.2004) (discussing objective standard in terms of insured’s “objectively reasonable” expectations); Buce v. Allianz Life Ins. Co., 247 F.3d 1133, 1147 (11th Cir.2001) (same); Baker, 171 F .3d at 942-43 (discussing objective standard in terms of “reasonabl[e] foreseeab[ility]”); see also Wickman, 908 F.2d at 1089 (discussing objective standard in terms of what plaintiff “reasonably should have expected”).

:: HHS Secretary Mike Leavitt Calls For “Four Steps” To Quality

At a meeting of business leaders representing large and small companies nationwide, DOL Secretary Leavitt said commitment to four “cornerstone” goals would lead to improved quality of care and lower costs:

• Standards for connecting health information technology, making it possible to share patient health information securely and seamlessly among health care providers

• Quality of care reporting, so that health care providers as well as the public can learn how well each provider measures up in delivering care

• Providing costs of health services in advance, so that when patients choose routine and elective care, they can make comparisons on the basis of both quality and how much of the total cost they will have to pay under their health plan

• Providing incentives for quality care at competitive prices, as inpayments to providers based on the quality of their services, or insurance options that reward consumers for choosing on the basis of quality and cost [from Pharmalive, November 17, 2006 PRNewswire release]

Read more here.

:: ERISA Plan Information Requests: (Unit 3) Who Is Entitled To Request Plan Information?”

The previous two Units address the statutory purpose of 29 U.S.C. 1024(b)(4). As observed there, some notable distinctions emerged in the view of the courts as to what documents are “plan information” subject to the statute.

The Sixth Circuit can be described as giving the statute a broad reading as to what constitutes “plan information”, see Bartling v. Fruehauf Corp., 29 F.3d 1062, 1072 (6th Cir.1994), whereas the Second and Fourth Circuits have given the statute a more narrow construction. CWA/ITU Negotiated Pension Board of Trustees of the CWA/ITU Negotiated Pension Plan v. Weinstein, 107 F.3d 139 (2d. Cir. 1997); Faircloth v. Lundy Packing Co. 91 F.3d 648 (4th Cir. 1996); see also, Ames v. American Nat. Can Co.170 F.3d 751 (7th Cir. 1999). Beyond that, it was observed that the good faith or not of the administrator and the resulting prejudice, if any to the participant, influenced outcomes so that the results were not always uniform.

Of the elements constituting a proper claim for plan information, this Unit 3 will begin the discussion of the question of “Who is entitled to request the plan information and from whom?”

The treatment of this issue will be taken up in three parts, as follows:

1. Who is a participant or beneficiary?
2. When may third parties advance statutory claims for participants or beneficiaries? and
3. Who are the proper parties to whom such requests must be directed?

Who is a participant or beneficiary?

As the statute reads, only participants or beneficiaries may request plan information subject to the disclosure requirement.

The statute defines these terms as follows:

(7) The term “participant” means any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.

(8) The term “beneficiary” means a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.

29 U.S.C. 1002 (7)(8)

The definitions belie the complexity that attends their application as will be seen below.

At what time is the definition applied?

The temporal aspect of the definition is important. The definition could be applied at the time of wrongdoing, or at the time suit is filed, or perhaps at some other time in between.

In Daniels v. Thomas & Betts Corp., 263 F.3d 66 (3rd Cir. 2001), for example, a widow sought relief against a plan fiduciary based on claims for death benefits. The Court noted that the damages, if any, would be payable by the fiduciary, not the plan. Thus, the question, was the widow an ERISA beneficiary at all?

The court answered affirmatively, stating:

We conclude, however, that ERISA beneficiary status should not be measured as of the time of the present appeal. Instead, the temporal focus of the “beneficiary” inquiry should be the time the request for plan documents was made. An individual who “is … entitled” to a plan benefit or who “may become entitled” to such a benefit, as of the time that individual makes the request of the plan administrator, thus constitutes a “beneficiary.”

Applying this definition, the Third Circuit in Gorini v. AMP Inc., 94 Fed.Appx. 913 (3rd Cir. 2004), held that a terminated employee still constituted a participant in a severance plan for purposes of the disclosure requirement. The Court stated:

Tyco tries to claim that Gorini was never qualified for participation in the 1991 severance plan because the only people eligible for benefits under it were “regular, full-time, salaried employees,” and Gorini made his request for severance benefits after Tyco sent a letter notifying him that his employment was terminated. Tyco’s position if adopted, would mean that only current employees could draw on severance plan benefits. That is inconsistent with the very concept of severance benefits.

On the other hand, in Kuntz v. Reese, 785 F.2d 1410, 1411 (9th Cir.1986), noted in Daniels v. Thomas & Betts, the Ninth Circuit held that former employees whose vested benefits under the plan had already been distributed were not “eligible to receive a benefit,” and were not likely to become eligible to receive a benefit, at the time that they filed the suit. Therefore, they were not plan participants entitled to disclosure of plan information.

The Kuntz Court stated:

“The … plaintiffs do not allege that their vested benefits were improperly computed, rather they allege breach of fiduciary duty or of a duty to disclose information about benefits, thus any recoverable damages would not be benefits from the plan.

Kuntz was abrogated by Kayes v. Pacific Lumber Co., 51 F.3d 1449 (9th Cir. 1995) based upon the Pension Annuitants Protection Act of 1994 (”PAPA”), Pub.L. No. 103-401 (Oct. 22, 1994), amendments to ERISA § 502(a), 29 U.S.C. § 1132(a) (clarifying that former participants or beneficiaries of terminated pension plans have standing to seek relief). Thus, the significance of Kuntz is left in doubt.

Nonetheless, the issues raised in Kuntz have survived in a broader debate. As noted by the district court in In re AEP Erisa Litigation, 437 F.Supp.2d 750 (S.D.Ohio)(2006), the Circuits have divided on the issue of when a former participant has standing. The district court contrasted the First, Second, Fifth, Sixth and Eighth Circuits as taking a broader view of participant status than the Fourth, Tenth and Eleventh Circuits.

(The court compared Vartanian v. Monsanto Co., 14 F.3d 697, 702-03 (1st Cir.1994); Mullins v. Pfizer, Inc., 23 F.3d 663, 667-68 (2d Cir.1994); Christopher v. Mobil Oil Corp., 950 F.2d 1209, 1220-21 (5th Cir.1992); Swinney v. Gen. Motors Corp., 46 F.3d 512, 518 (6th Cir.1995); Adamson v. Armco, Inc., 44 F.3d 650, 654-55 (8th Cir.1995) with the outcomes in Stanton v. Gulf Oil Corp., 792 F.2d 432, 433 (4th Cir.1986); Raymond v. Mobil Oil Corp., 983 F.2d 1528, 1535 (10th Cir.1993);and Sanson v. Gen. Motors Corp., 966 F.2d 618, 619 (11th Cir.1992).)

Thus, the determination of participant or beneficiary status can be nuanced as the foregoing discussion illustrates. In fact, the decisions on standing are often intermixed with (or determined by) conclusions as to the merits of the claims.

“Colorable Claim To Benefits”

In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989), the United States Supreme Court set a boundary on the concept of participants and beneficiaries that is often used as a touchstone in evaluating the status of a participant or beneficiary under a plan. The Court stated:

Congress did not say that all “claimants” could receive information about benefit plans. To say that a “participant” is any person who claims to be one begs the question of who is a “participant” and renders the definition set forth in § 1002(7) superfluous . . . In our view, the term “participant” is naturally read to mean either “employees in, or reasonably expected to be in, currently covered employment,” Saladino v. I.L.G.W.U. National Retirement Fund, 754 F.2d 473, 476 (CA2 1985), or former employees who “have . . . a reasonable expectation of returning to covered employment” or who have “a colorable claim” to vested benefits, Kuntz v. Reese, 785 F.2d 1410, 1411 (CA9) (per curiam), cert. denied, 479 U.S. 916, 107 S.Ct. 318, 93 L.Ed.2d 291 (1986). In order to establish that he or she “may become eligible” for benefits, a claimant must have a colorable claim that (1) he or she will prevail in a suit for benefits, or that (2) eligibility requirements will be fulfilled in the future.

The Third Circuit applied this boundary in Daniels v. Thomas & Betts Corp, stating, “[w]e have said that “the concept of a colorable claim necessarily encompasses situations in which the requester has a reasonable basis for believing that he or she has a meritorious claim but is in fact mistaken.”

Thus, in Mead v. Intermec Techs. Corp., 271 F.3d 715, 717 (8th Cir.2001), where each claim for short-term disability benefits was dismissed on summary judgment, plaintiff was held not to be a plan participant because he had no colorable claim for benefits. See, also, Johnson v. Buckley, 356 F.3d 1067 (9th Cir. 2004) (employees’ claims fail as they were permanently terminated and not temporarily laid off and thus had no colorable claim for benefits).

On the other hand, the Seventh Circuit has stated that the requirement of a colorable claim “is not a stringent one.” The Court observed that:

A plaintiff achieves status as a beneficiary if they have even an “arguable” claim; “[o]nly if the language of the plan is so clear that any claim as an assignee must be frivolous is jurisdiction lacking.” Kennedy, 924 F.2d at 700; see also Panaras, 74 F.3d at 790. Even in cases where a plaintiff’s claim ultimately failed, the “possibility” of success was sufficient to establish participant or beneficiary status. Kennedy, 924 F.2d at 701; see also Jackson v. E.J. Brach Corp., 176 F.3d 971, 979 (7th Cir.1999); Riordan, 128 F.3d at 552; Panaras, 74 F.3d at 790. A determination regarding the relative strength of that claim has often been deemed to go to the merits, not to whether standing as a participant or beneficiary was demonstrated. See Riordan, 128 F.3d at 552; Kennedy, 924 F.2d at 701.

Conclusion

Only participants and beneficiaries are entitled to plan information under the statute, but in the event of separation of employment, the question can be more challenging that it first appears. In many cases, such as those involving retirement benefits, severance benefits, disability benefits, retiree or continuation health coverage, and so forth, the issue of standing will be a first consideration.

In that regard, a review of the prevailing law on the issue of standing is essential. The list of cases set forth above from In re AEP Erisa Litigation, 437 F.Supp.2d 750 (S.D.Ohio) (2006) is representative of the varying points of view.

The next Unit in this series will address the question of when third parties may advance requests for benefits. This issue arises, for example, when a participant’s attorney, rather than the participant, makes the request. After a discussion of that issue, a suggested format for such requests will be offered for consideration.

<< Previous: ERISA Plan Information Requests: (Unit 2) “Statutory Purpose and Scope” <<

>> Next: ERISA Plan Information Requests: (Unit 4) “Who Is Entitled To Request Plan Information?”>>

:: Hospital’s ERISA Claims Against TPA and PPO Network Dismissed

As noted in a previous article on provider reimbursements, courts have struggled with whether such assignments should elevate providers to claimant status under 29 U.S.C. § 1132(a). In a recent case, the limitations of such status even when acheived is well illustrated.

In Baptist Memorial Hospital-Desoto, Inc.’s v. Crain Automotive, Novasys Health Network, LLC; and Coresource, 2006 WL 2987632, (N.D.Miss.) (October 17, 2006), the hospital sought payment from the defendants for services rendered to an participant in the Crain Automotive group health plan. The matter appeared before the district court on a motion by the hospital for summary judgment and motions to dismiss by Coresource (the “TPA”) and Novasys (the “PPO”) for failure to state a claim under which relief could be granted.

The Hospital’s Claims As Assignee

The hospital sued as an assignee under 29 U.S.C. § 1132(A)(1)(B) and advanced no other theories of recovery. As the Court stated:

[P]laintiff’s Complaint confined its causes of actions to (1) recovery of assigned plan benefits against defendants under 29 U.S.C. § 1132(A)(1)(B) (“A civil action may be brought by a participant or beneficiary ··· to recover benefits due him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.”); and (2) an award of attorneys’ fees and costs against defendant pursuant to 29 U.S.C. § 1132(g)(1). Nowhere in the Complaint does the plaintiff alleged any additional causes of action- e.g., state law actions such as breach of contract.

As an assignee of the ERISA beneficiary’s rights, the hospital then had a very limited array of options. On the positive side, the hospital could pursue the claim for benefits against the plan. Of course, that action is constrained by all of the typical limitations of claims for benefits such as the rules permitting deference to plan interpretations and decisions of plan administrators, limitation of discovery and evidence to the administrative record, preclusion of extra-contractual damages, and so forth.

Further, though not pertinent to the district court’s opinion, a claim as an assignee always carries the risk that the plan will assert defenses based upon plan provisions such as an anti-assignment clause (the terms and efficacy of which encompasses a distinct area of jurisprudence to itself).

As an example of the vagaries of fate that may be visited upon the assignee, the hospital’s motion for summary judgment against the plan ran afoul of plan terms imposing “reasonable and customary” limitations, and factual issues as to the allowable discount on the billed charges. Thus, given these open factual questions, the court denied the hospital’s motion for summary judgment.

Further, the hospital having cast its claims as sounding in ERISA, whatever contractual arguments were advanced against the TPA and PPO fell on deaf ears. The court stated:

In any event, such state law claims would be completely preempted by ERISA since the beneficiary under the subject Plan assigned his rights to the Hospital “under the terms of this plan.” 29 U.S.C. § 1132(A)(1)(B); Hermann Hospital v. MEBA Med. & Ben. Plan, 845 F.2d 1286, 1290 (5th Cir.1988) (ERISA preempts an action to recover benefits under anERISA plan when the beneficiary assigned his rights thereunder to the plaintiff hospital). Therefore, all of the plaintiff’s arguments regarding breach of contract claims against any of the defendants are without merit since they were not pled and would be preempted by29 U.S.C. § 1132(A)(1)(B).

However challenging the task of a hospital-as-assignee as against the plan, the choices available to a hospital are even more constrained when it seeks to expand the defendant
class beyond the plan administrator. Finding no sufficient allegation in the complaint to hold the TPA or PPO responsible for the hospital’s charges, the Court denied the hospital’s motion for summary judgement against these parties in what was to be a harbinger of the outcome of these defendants’ motions to dismiss.

The TPA and PPO Motions To Dismiss

In the face of the motions to dismiss by Coresource and the PPO, the hospital chose to proceed nonetheless with its claim for assigned plan benefits under 29 U.S.C. § 1132(a) (1)(B). As noted above, a hospital on this track has a limited menu of options for recovery against such parties. One of the prerequisites is fiduciary status, or at least an allegation of same.

In this case, however, the hospital did not allege the fiduciary status of the TPA or PPO, but based its claim upon a broad contractual allegation that the defendants’ separate contracts with one another gave rise to a single binding contract. Viewing such claims as preempted in any event, the Court commented in dicta that such claims would not be viable under State law:

[E]ven if this action were characterized as one alleging breach of contract against the Crain Plan, Coresource (the third-party administrator of the Crain Plan), and Novasys (the Preferred Provider Organization providing the network), the law in Mississippi does not support the plaintiff hospital’s argument that all of the contracts between the various entities create a single contract binding Coresource and Novasys to actually fund the bill currently owed to the hospital. Although the Mississippi Supreme Court in Phillips Petroleum Company v. Stack, 231 So.2d 475, 481 (Miss.1970) ruled that “[w]here several instruments are made a part of a single transaction they will all be read and construed together as evidencing the intention of the parties in regard to the single transaction,” there is nothing in Phillips that clearly allows for several instruments to create a single transaction when different parties are involved.

Having found no basis in the complaint for holding the TPA or PPO in the case, the Court had little choice but to grant the defendants’ motions to dismiss. This consequence turned upon the very language of § 1132(a)(1)(B) itself.

The Complaint limits the hospital to recovery of assigned plan benefits under ERISA, 29 U.S.C. § 1132(a)(1)(B) and attorneys’ fees pursuant to § 1132(g). Nowhere in the Complaint does the plaintiff seek recovery under any other theory, including breach of fiduciary duty or state claims such as breach of contract . . . No motion to amend the complaint has been filed. This leaves the question of whether the hospital can prove any set of facts that would render Coresource liable under § 1132(a)(1)(B) or § 1132(g) to actually fund the bill owed to the hospital. The hospital has pointed to no contractual language binding Coresource to the hospital which requires Coresource to actually fund payments owed to the hospital by the Crain Plan. Indeed, the hospital does not dispute that there is no actual agreement between Coresource and the hospital other than an argument that all of the subject agreements constitute one agreement binding everyone to everyone-an argument the court has rejected as a matter of law above. Furthermore, there is no dispute that there is no actual contract between Coresource and the beneficiary. This is important because the plaintiff only has the same rights at the beneficiary given the assignment.

Note: Advancing provider reimbursement claims against health plans and other defendants has become a complicated endeavor. Aside from potential liability from asserting improper claims (see Balance Billing Practices article), providers face several hurdles in articulating and pressing viable claims under (or in some cases, outside) the ERISA regime.

The present case demonstrates that , as an assignee, a provider has little, if any, recourse to State law to buttress its claims. As so often the issues include questions of precertification of benefits (see, e.g., previous article regarding precertification dispute), the scope or operation of the managed care network, and so forth, allegations of fiduciary status offer the only real opportunity to include such parties in a claim for benefits. Fiduciary status allegations, where warranted, stand a much better chance against a 12(b)(6) motion to dismiss which was the fate of the provider in Baptist Memorial Hospital-Desoto above.

Though the court pointed out that State law claims as argued (though perhaps not pled) would have been preempted in any event, some cases suggest a different result depending on the facts.

For example, contractual claims based upon third party beneficary theories have succeeded where based upon an independent legal duty, such as the managed care contract, and not as assignees of patient benefits. See, e.g., Pascack Valley Hosp., Inc. v. Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393, 396 (3d Cir.2004), Newark Beth Israel v. Northern New Jersey Teamsters Ben. Plan 2006 WL 2830973 (D.N.J.) (September 29, 2006) discussed here.

On the other hand, where the issue is over the right to payment and not the amount of payment, these cases may be unavailing:

The providers are asserting contractual breaches ··· that their patient-assignors could not assert: the patients simply are not parties to the provider agreements between the Providers and Blue Cross. The dispute here is not over the right to payment, which might be said to depend on the patients’ assignments to the Providers, but the amount, or level, of payment, which depends on the terms of the provider agreements.

Blue Cross of California v. Anesthesia Care Associates Medical Group, Inc., 187 F.3d 1045 (9th Cir.1999)

:: Healthcare Reform: Agenda of the New Congress

The elections are over and the dust is settling. It appears that the venerable Sen. Edward M. Kennedy of Massachusetts, a liberal icon, will chair the Health, Education, Labor, and Pensions Committee. What will be the health care agenda for the newly empowered Democratic leadership?

Senator Kennedy has an “agenda” section on his website which offers an insight into his views on the subject.

His ultimate goal: Medicare For All because, he says, “Americans . . . are dearly in love with Medicare.” The Senator opines:

An essential part of our progressive vision is an America where no citizen of any age fears the cost of health care, and no employer refuses to create new jobs or cuts back on current jobs because of the high cost of providing health insurance.The answer is Medicare, whose 40th birthday we will celebrate in July. I propose that as a 40th birthday gift to the American people, we expand Medicare over the next decade to cover every citizen – from birth to the end of life.

For the near future, however, predictions are more restrained. Bloomberg provides an inside on the U.S. Chamber’s expectations:

Specific priorities may include extending health coverage to the approximately 42 million uninsured Americans, with a renewed emphasis on implementing a universal health insurance system and/or employer mandates. Additionally, Medicare Part D could return to the spotlight.

:: Subrogation Claim Reaches UIM Coverage But Fails To Avert Make Whole Defense

Nowhere in the plan language is there a suggestion, let alone a clear statement, that a plan beneficiary is signing away his or her make whole rights. Neither the make whole doctrine nor any euphemism sounding like the make whole doctrine is mentioned in the plan. Similarly, application of the make whole doctrine as a “gap filler” would not contravene any statement from the plan heretofore quoted to the Court by the parties. Providence Health System-Washington v. Bush, 2006 WL 3249199 (W.D.Wash.) (November 8, 2006)

Following a serious accident injuring Terri Block’s daughter, Sarah Block, Farmer’s Insurance Company agreed to settle her underinsured motorist claims for $2,100,000. As an employee of Providence Health System, Terri had coverage for Sarah under her group health plan. The health plan had paid $801,664.72 toward Terri’s medical care and was expected to reach one million in expenditures (presumably the lifetime maximum under the plan).

The health plan contained several provisions authorizing recovery of expenditures in instances where other insurance or funds were available. Nonetheless, through a series of State court maneuvers, a guardianship was established for Sarah and a special needs trust containing a “spendthrift clause” was set up for receipt of the settlement funds. Providence intervened in the State court proceeding, but its attempt to have its claims heard before funding of the trust was rebuffed.

While that case was on appeal, Providence filed a complaint against Terri Block for breach of contract and against the Trustee of the Special Needs Trust requesting that the court impose a constructive trust on the funds to protect its claims for reimbursement. The matter then came before the district court on cross motions for summary judgment.

Proceedings In District Court

The defendants advanced three arguments: (1) lack of jurisdiction on the view that Section 502(a)(3) only authorizes actions against beneficiaries in possession of funds, (2) that the beneficiary had not been “made whole” and (3) that the plan provisions did not authorize recovery of “first party”, i.e., UIM funds.

The District Court Had Jurisdiction Over The Trust

First, the defendants argued that the Court lacked subject matter jurisdiction because the funds had been transferred to a trust and were not within the possession of a beneficiary of the Plan. Since the plan did not seek to impose personal liability on the trustee, however, and since the funds were readily traceable to the trust, the Court rejected this argument:

Defendants argue that “appropriate equitable action” under § 502(a)(3) can only be taken against a participant in the plan. Defendants are wrong. The Sereboff decision acknowledges a “familiar rule of equity that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as he gets a title to the thing.” Id. at 1877. The action which Providence pursues against the Trustee targets a readily traceable fund and does not seek to impose personal liability on the Trustee. The trustee has possession of the funds and he took possession of the funds knowing that an equitable lien had been asserted by the plaintiff. This Court has subject matter jurisdiction over plaintiff’s equitable action to impose a constructive trust over these funds.

The Make Whole Doctrine Applies

Second, the defendants argued that Sarah Block had not been made whole by the payment of UIM benefits by Farmers. Providence countered by arguing that the make whole doctrine consisted of a State common law notion, and that federal common law preempts state common law on the subject. To further support its position, Providence argued that the federal common law prevented application of the make whole doctrine given the plan language and its discretion to interpret that language.

On this point the Plan did not fare as well. To understand the issue, one must review the applicable plan language as the result in the case essentially turned on the wording.

The plan provisions at issue were as follows:

Situations may arise in which health care expenses are also covered by a source other than the plan. If so, the plan won’t provide benefits that duplicate the other coverage. For example, the plan won’t provide benefits that duplicate those available to a covered person under No-Fault motor vehicle or similar insurance, or through a state-sponsored program such as DSHS. If another plan is the primary payor, a copy of the other plans’ Explanation of Benefits (EOB) should be included with the claim you submitted to Providence Health Plan.

Third-Party Liability – If someone else is legally responsible or agrees to compensate you for injuries suffered by you or a family member, you will need to reimburse the plan for up to 100% of any benefits the plan paid in connection with those injuries. This reimbursement may be reduced in the same proportion by which the settlement, judgment or other recovery is reduced for payment of costs and attorneys’ fees reasonably incurred in obtaining that recovery.

Recovery of Excess Payments-Whenever payments have been made in excess of the amount necessary to satisfy the provisions of this plan, the plan has the right to recover those excess payments from any individual, insurance company, or other organization to whom the excess payments were made····

In reviewing the foregoing language in the context of the make whole argument, the district court turned to Barnes v. Independent Automobile Dealers Ass’n. of Cal. Health & Welfare Plan, 64 F.3d 1389 (9th Cir.1995). In that case, the Ninth Circuit Court of Appeals adopted as federal common law that, in the absence of a clear contract provision to the contrary, an insured must be made whole before an insurer can enforce its right to subrogation. Id. at 1395.

The Ninth Circuit described the make whole rule as a “gap filler” when the plan provisions are silent on the issue. The Court stated:

No one doubts that the beneficiary of an insurance policy or (as here) an employee welfare or benefits plan can if he wants sign away his make-whole right. The right exists only when the parties are silent. It is a gap filler.

Reviewing the language before it, the district court concluded that the Providence plan did not adequately address the issue and applied the make whole doctrine. The court stated that:

Nowhere in the plan language is there a suggestion, let alone a clear statement, that a plan beneficiary is signing away his or her make whole rights. Neither the make whole doctrine nor any euphemism sounding like the make whole doctrine is mentioned in the plan. Similarly, application of the make whole doctrine as a “gap filler” would not contravene any statement from the plan heretofore quoted to the Court by the parties.

Nor would the Court permit the plan administrator to remedy the silence by interpretation of the provisions as a fiduciary. The Court stated:

The rule advocated by counsel would give the plan administrator unfettered discretion to create terms and conditions never intended by the parties, no matter how unreasonable. While the discretion conferred upon the plan administrator is necessarily broad, it cannot be exercised in such a way as to abrogate important rights of the beneficiary without so much as a hint that the parties intended such an outcome.

Thus, the Providence plan claim for reimbursement, already subject to a reduction for attorneys’ fees by virtue of the concession stated in the plan document, stood to have its claim further reduced. Inasmuch as the defendants contended that Sarah’s life care plan could reach $17 million, the application of the make whole doctrine promised to work a substantial reduction of the plan’s reimbursement claims.

The Plan Language Applied To “First Party” Coverage

The defendants presented another argument based upon plan language that could have completely unseated any plan claim to reimbursement. The defendants contended that the settlement funds paid to representatives of Sarah Block constituted first party funds and therefore the plan, by its own terms, has no claim against them.

The court rejected this argument, however, stating that “[t]he plan language is broad enough to include the payments made by Farmer’s Insurance (“someone else”).” In addition, the court noted that, under Washington law, an UIM payment is treated as coming from the tortfeasor (“third party”). (citing, Hamm v. State Farm Mut. Auto. Ins. Co., 151 Wash.2d 303, 308 (2004)).

Note: In addition to Barnes v. Independent Automobile Dealers Ass’n. of Cal. Health & Welfare Plan, 64 F.3d 1389 (9th Cir.1995) (the Ninth Circuit “make whole” case), the court considered three other cases in applying the make whole doctrine and commented on each as follows:

• In Beveridge v. Benefit Recovery, Inc., 2006 WL 2052696 (D.Ariz.)

The ERISA plan in question clearly stated that “[t]he Plan’s right of subrogation and repayment is not subject to the insured/injured party first being made whole, that is, ‘make whole’ rule does not apply to the Plan.” . . . In the face of such language, the plaintiff-beneficiary did not argue the applicability of the make whole doctrine.

• Moore v. Capital Care, Inc., 461 F.3d 1 (C.A.D.C.2006) [see discussion on this site here]

[T]he plan language provided that the “Participant shall pay the Corporation all amounts recovered by suit, settlement, or otherwise from any suit, settlement, or otherwise from any third party or his insurer to the extent of the benefits provided by this Contract.” . . . The Circuit Court found such language to be completely inconsistent with the notion that the participant could retain all settlement funds to the extent necessary to make her whole.

• Administrative Committee of Wal-Mart Stores, Inc. v. Shank, 2006 WL 2546797 (ED Mo.2006)

[T]he plan in question made clear that “the plan has first priority with respect to its right to reduction, reimbursement and subrogation.”

The district court’s opinion does not indicate whether the plan argued that Sereboff precludes application of the make whole doctrine. The beneficiary in Sereboff urged the Court to apply the make whole doctrine as an equitable defense, but Justice Roberts stated that the plan’s claim arose by virtue of agreement, not equity, and thus such defenses would inapplicable. Whether courts may continue to apply “gap fillers” such as the make whole doctrine remains to be seen.

In the meantime, plan administrators should include a disclaimer of the doctrine in plan documents so as to remove any argument over the issue. On the other hand, in jurisdictions favoring the doctrine such as the Ninth and Eleventh Circuits, plan beneficiaries should review plan documents with an eye to the sufficiency of the reimbursement provision in view of the doctrine.

:: ERISA Plan Information Requests: (Unit 2) “Statutory Purpose and Scope”

Unit 1 of this series provided an overview of the disclosure requirements of 29 U.S.C. 1024(b)(4). In that article it was noted that certain items are easy to identify as subject to the provision, such as the plan document, the summary plan description,the annual or terminal reports. On the other hand, the open-ended category of “other instruments under which the plan is established or operated” has cause more difficulty.

This article constitutes the second part of the inquiry into what information is subject to the disclosure requirements. In this Unit 2, specific examples will be provided through reference to caselaw. The results are not uniform and courts have divided between a “textualist” interpretation of the statute and a broader interpretation based upon the legislative intent that the provision aid a participant in understanding the status of his or her benefits.

Examples From Application of The Statute

Cline v. Industrial Maintenance Engineering & Contracting Co., 200 F.3d 1223 (9th Cir. 2000) [Nonexistent documents] Plan administrator is not protected from ERISA liability for failure to furnish nonexistent documents. If any current documents do not exist at the time of a request, it is consistent with the aims of ERISA to impose a penalty on the plan administrator if administrator does not prepare a mandatory document where none previously existed.

Ames v. American Nat. Can Co., 170 F.3d 751 (7th Cir. 1999) [Copy of Severance Plan] District court did not abuse its discretion in declining to fine employer for failing to give plan participants copy of severance plan in violation of ERISA section requiring disclosure of “other instruments” where provisions were in a handbook.

Faircloth v. Lundy Packing Co. 91 F.3d 648 (4th Cir. 1996) [Determination letter, bonding policy, valuation reports, trustee meeting minutes, funding policy] (1) Internal Revenue Service (IRS) determination letter (2) bonding policy insuring ESOP against fiduciary misconduct (3) appraisal reports or valuation reports of employer’s stock and documents concerning employer’s financial status and operations supplied to each person or entity that prepared appraisal or valuation reports did not have to be disclosed (4) trustees’ meeting minutes within last three years not subject to requirement that plan administrator furnish participant with “other instruments under which the plan is established or operated”. On the other hand, the funding and investment policies of plan were subject to the disclosure requirement.

Bartling v. Fruehauf Corp. 29 F.3d 1062 (6th Cir. 1994) [Minutes, resolutions, tax forms, actuarial report] Minutes, resolutions, written communication, tax forms, and explanations need not be provided when the ESOP has been established and operated under the standard, specified documents. Additionally, minutes, resolutions, written communication, tax forms, and explanations are not formal instruments under which the plan is established or operated. On the other hand, because an actuarial valuation report is required for every third plan year, § 1023(d), these reports are indispensable to the operation of the plan. As such, they are “instruments under which the plan is operated,” which must be disclosed upon request under the plain language of § 1024(b)(4).

Shields v. Local 705, Intern. Broth. of Teamsters Shields v. Local 705, Intern. Broth. of Teamsters Pension Plan, 188 F.3d 895 (7th Cir. 1999) [Outdated plan descriptions] Administrator’s failure to provide outdated descriptions did not trigger ERISA penalty provisions.

Cossey v. Associates’ Health and Welfare Plan, 363 F.Supp.2d 1115 (E.D.Ark. 2005) [Administrative record] Administrator of ERISA group health plan was not subject to statutory penalties due to its delay in providing plan beneficiary with copy of administrative record. 29 C.F.R. § 265.503-1(h)(2)(iii).

Hamall-Desai v. Fortis Benefits Ins. Co., 2004 WL 3354864
(N.D.Ga.2004) [Claim reviewers' reports] Plan administrator breached disclosure duty under ERISA by failing to disclose to participant reports of reviewers that were generated in response to participant’s second administrative appeal of benefits denial.

Phelps v. Qwest Employees Ben. Committee (Not Reported in F.Supp.2d, 2005 WL 3280239 (D.Colo.,2005) [Proxy voting policies; investment guidelines] Proxy voting policies need not be produced, but investment guidelines are subject to disclosure requirement.

Armstrong v. Liberty Mut. Life Assur. Co., 2004 WL 540273 (S.D.N.Y. 2004) [Managed disability report, surveillance tapes] Sanctions against employer and plan administrator, for not producing managed disability report, not producing particular surveillance tapes were not warranted due to lack of prejudice to beneficiary.

Cherry v. Toussaint, 31 Employee Benefits Cas. 1074
(S.D.N.Y. 2003) [Financial data] Fine imposed upon trustees of pension plan for delay in satisfying requirement that they provide financial data to plan member.

Armstrong v. Liberty Mut. Life Assur. Co. of Boston, 273 F.Supp.2d 395 (S.D.N.Y. 2003) [Diary, records supplied therapist] Sanctions would not be imposed under ERISA against plan administrator for failure to provide beneficiary with copy of diary and records supplied to physical therapist, absent prejudice or bad faith.

Davis v. Commercial Bank of New York, 275 F.Supp.2d 418
(S.D.N.Y. 2003) [Nonexistent documents] Employer’s failure to promptly inform employee that no additional ERISA plan documents existed for severance plan outlined in employee handbook, in response to employee’s request for plan documents, did not warrant a fine, although it constituted a technical violation of ERISA.

Kamler v. H/N Telecommunication Services, Inc., 305 F.3d 672 (7th Cir. 2002) [Outdated documents] District court did not abuse its discretion in declining to impose ERISA penalties on employer and plan administration corporation for failing to provide employee with outdated plan documents he requested.

DeLeon v. Bristol-Myers Squibb Company Long Term Disability Plan, 203 F.Supp.2d 1181 (D.Or. 2002) [Administrative file] Claims administrator, as delegatee of plan administrator, was liable for penalties relating to its failure to provide ERISA beneficiary with timely, complete copy of administrative file upon beneficiary’s request after it denied beneficiary long-term disability benefits.

McNutt v. J.A. Jones Const. Co., 33 F.Supp.2d 1375
(S.D.Ga. 1998) [Claims forms] Administrator of ERISA plan was not subject to penalty for failing to provide claim forms to employee, since ERISA did not require plan administrators to provide claim forms to plan participants.

Dall v. Chinet Co., 33 F.Supp.2d 26 (D.Me. 1998) [Information regarding early retirement benefits] ERISA plan administrator’s failure to respond to participant’s request for information regarding early retirement benefits did not warrant imposing civil penalty where no bad faith or prejudice shown.

Brooks v. Metrica, Inc., 1 F.Supp.2d 559 (E.D.Va.1998)
[Identification of Named Fiduciaries] Request for identification of 401(k) plan’s named fiduciaries subject to disclosure requirement.

Celi v. Trustees of Pipefitters Local 537 Pension Plan, 975 F.Supp. 23 D.Mass.,1997 [Unamended plan] Pension plan trustees’ delay in sending to participant unamended version of plan did not warrant imposition of statutory penalties under ERISA where no difference in amended and unamended plan.

Brown v. American Life Holdings, Inc.64 F.Supp.2d 882 (S.D.Iowa 1998) [Annual report, meeting minutes, tax forms, explanations] Administrator is required to provide “other instruments” only when the documents specifically listed under § 1024(b)(4) are unavailable, and then the administrator need provide only those documents that are similar in nature to the specifically listed documents. Minutes, resolutions, written communication, tax forms, and explanations need not be provided when the ESOP has been established and operated under the standard, specified documents. Additionally, minutes, resolutions, written communication, tax forms, and explanations are not formal instruments under which the plan is established or operated; however, penalty imposed for failure to provide annual report.

Jackson v. Brach Corporation, 937 F.Supp. 735 (N.D.Ill. 1996) [Outdated documents, SPD] employer as plan administrator could not be penalized for failing to provide outdated documents which had no current application whatsoever; (2) employer’s failure to produce more than two-page summary of severance plan constituted violation of ERISA disclosure provision which requires production of plan description and summary plan description (SPD); and (3) penalty of $6,920 would be assessed against employer for failure to disclose plan description and SPD.

Department of Labor (“DOL”) Advisory Opinion letters [Trustee meeting minutes] Trustee meeting minutes, treasurer’s reports not part of a plan’s annual report, and reports to state governments do not necessarily have to be disclosed under § 1024(b)(4). The letters contrast minutes of a meeting in which trustees review the performance of an investment manager, which would not have to be disclosed, and minutes of a meeting in which the trustees establish a claim procedure, which would have to be disclosed. See DOL Advisory Opinion Letters 87-010A, 82-021A, and 82-033A.

Conclusion

The foregoing treatment is not exhaustive, but it should indicate in broad outline the types of information that tend to be included or excluded from the disclosure requirement. Requests for an administrative record, actuarial information, meeting minutes and how the non-existence of required documents must be treated are all good examples of the varying outcomes depending on the venue.

In the end, prejudice to the participant or bad faith by the administrator tend to color the courts’ opinion of what must be disclosed. In fact, it is difficult in many cases to devine what a given court deems to be subject to the statute in view of the court’s discussion of the presence or absence of prejudice or bad faith in reaching its conclusion.

In the final analysis, however, plan administrators should err on the side of producing information where feasible since this approach avoids the risk of noncompliance, the possibility of prejudice and and appearance of bad faith. On the other hand, plan participants should exercise care to request documents that are clearly required when possible and other information with some discretion based on the jurisdiction. From the participant’s standpoint, requests that are overly broad risk creating the impression with the court that a technical violation is sought rather than information without which the participant will be prejudiced in pursuing benefit claims.

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:: Health Plan Subrogation Provisions: A Revue

I am not sure why this has not been done before, but it occurred to me that perhaps there would be interest in a catalog of subrogation provisions from notable cases. Below are my selections for a subrogation provision revue.

These clauses are not quoted in their entirety, but taken from case excerpts. Many cases were overlooked because I didn’t find suitable quotes. Of course, these provisions are not recommended as presented necessarily, but the language should provoke thought as to what is better or worse for inclusion in a health plan document. For my conclusions on essential elements of a subrogation provision, see my notes here.

Be that as it may, here are my selections. (Nominations of additional cases are welcome and will be added to the list.)

• Sereboff v. Mid-Atlantic, 126 S.Ct. 1869, 164 L.Ed.2d 612, 74 USLW 4240 (2006):

The plan provides for payment of certain covered medical expenses and contains an “Acts of Third Parties” provision. This provision “applies when [a beneficiary is] sick or injured as a result of the act or omission of another person or party,” and requires a beneficiary who “receives benefits” under the plan for such injuries to “reimburse [Mid Atlantic]” for those benefits from “[a]ll recoveries from a third party (whether by lawsuit, settlement, or otherwise).” App. to Pet. for Cert. 38a. The provision states that “[Mid Atlantic's] share of the recovery will not be reduced because [the beneficiary] has not received the full damages claimed, unless [Mid Atlantic] agrees in writing to a reduction.” Ibid.

• Popowski v. Parrott, 461 F.3d 1367 (11 Cir. 2006):

The subrogation and reimbursement provision in the Mohawk Plan, unlike that of the United Distributors Plan, claims a right to reimbursement “in full, and in first priority, for any medical expenses paid by the Plan relating to the injury or illness,” but does not specify that that reimbursement be made out of any particular fund, as distinct from the beneficiary’s general assets. Instead, it makes receipt of “a settlement, judgment, or other payment relating to the accidental injury or illness” a trigger for the general reimbursement obligation. Id. Further, in requiring reimbursement “in full,” it fails to limit recovery to a specific portion of a particular fund. Accordingly, we conclude that, because the Mohawk plan fails to specify that recovery come from any identifiable fund or to limit that recovery to any portion thereof, it fails to meet the requirements outlined in Sereboff for the assertion of an equitable lien for the purposes of 29 U.S.C. § 1132(a)(3).

• Moore v. CapitalCare, Inc., 461 F.3d 1 (D.C. Cir. 2006):

2. Subrogation ….

a. To the extent that benefits for covered services are provided or paid under this Contract, the Corporation shall be subrogated and succeed to any rights of recovery of a Participant for expenses incurred against any persons or organizations except insurers on policies of health insurance issued to and in the name of the Participant.

b. The Participant shall pay the Corporation all amounts recovered by suit, settlement, or otherwise from any third party or his insurer to the extent of the benefits provided by this Contract.

c. Attorneys’s [sic] fees, court costs, and any other costs expended in the course of securing recovery by suit, settlement, or otherwise, shall be subtracted from the amount to be paid to the Corporation; the amount to be subtracted shall be as follows:

(1) If the case is settled out of court-one-quarter of the amount of benefits paid or to be paid for covered services; or to be paid for covered services or

(2) If the case is settled as a result of litigation–one third of the amount of benefits paid or to be paid for the covered services.

• Administrative Committee of Wal-Mart Stores, Inc. v. Shank, 2006 WL 2546797 (E.D.Mo. Aug 31, 2006):

Plaintiff relies on the “Right to Reduction, Reimbursement and Subrogation” provision contained in the January 2000 Summary Plan Description (SPD). This provision provides in relevant part as follows:

[t]he Plan has the right to 1) reduce or deny benefits otherwise payable by the Plan and 2) recover or subrogate 100 percent of the benefits paid or to be paid by the Plan on your behalf and or your dependents to the extent of any and all of the following payments: Any judgment, settlement or any payment made or to be made, relating to the accident, including but not limited to other insurance. SPD at 19. The SPD further states that “[t]he Plan has first priority with respect to its right to reduction, reimbursement and subrogation.” In addition, the SPD provides that “[a]ll attorney’s fees and court costs are the responsibility of the participant, not the Plan.” Id. at 19.

• Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S.Ct. 708 (2002):

The Plan includes a reimbursement provision that is the basis for the present lawsuit. This provides that the Plan shall have “the right to recover from the [beneficiary] any payment for benefits” paid by the Plan that the beneficiary is entitled to recover from a third party. App. 58. Specifically, the Plan has “a first lien upon any recovery, whether by settlement, judgment or otherwise,” that the beneficiary receives from the third party, not to exceed “the amount of benefits paid [by the Plan] ··· [or] the amount received by the [beneficiary] for such medical treatment ··· .” Id., at 58-59. If the beneficiary recovers from a third party and fails to reimburse the Plan, “then he will be personally liable to [the Plan] ··· up to the amount of the first lien.”

[Of course, the "personally liable" provision in the Great West plan is, as we now know, a non-starter. As the decision in that case determined, participants cannot be held personally liable for reimbursement.]

• Providence Health System-Washington v. Bush, 2006 WL 3249199 (W.D.Wash.) (November 8, 2006)

Situations may arise in which health care expenses are also covered by a source other than the plan. If so, the plan won’t provide benefits that duplicate the other coverage. For example, the plan won’t provide benefits that duplicate those available to a covered person under No-Fault motor vehicle or similar insurance, or through a state-sponsored program such as DSHS. If another plan is the primary payor, a copy of the other plans’ Explanation of Benefits (EOB) should be included with the claim you submitted to Providence Health Plan.

Third-Party Liability – If someone else is legally responsible or agrees to compensate you for injuries suffered by you or a family member, you will need to reimburse the plan for up to 100% of any benefits the plan paid in connection with those injuries. This reimbursement may be reduced in the same proportion by which the settlement, judgment or other recovery is reduced for payment of costs and attorneys’ fees reasonably incurred in obtaining that recovery.

Recovery of Excess Payments-Whenever payments have been made in excess of the amount necessary to satisfy the provisions of this plan, the plan has the right to recover those excess payments from any individual, insurance company, or other organization to whom the excess payments were made····

This language failed to sufficiently disclaim the make whole doctrine. [See, ::Subrogation Claim Reaches UIM Coverage But Fails To Avert Make Whole Defense]

The Court stated:

Nowhere in the plan language is there a suggestion, let alone a clear statement, that a plan beneficiary is signing away his or her make whole rights. Neither the make whole doctrine nor any euphemism sounding like the make whole doctrine is mentioned in the plan. Similarly, application of the make whole doctrine as a “gap filler” would not contravene any statement from the plan heretofore quoted to the Court by the parties.

:: Healthcare Security Ordinance Challenged As Preempted By ERISA

With the changing fortunes in Congress, pundits have forecast more initiatives to address healthcare concerns. As to the possible form of such proposals, one might review the AFL-CIO “Fair Share Health Care” campaign in which “activists are working with state legislators to win legislation to require corporations to pay their fair share for health care.”

Inevitably, however, State and local initiatives will encounter the preemptive borders of ERISA if employer mandates form a part of the funding of such plans. In the most recent example, the Golden Gate Restaurant Association, described as a nonprofit group representing the interests of restaurant owners, filed suit yesterday in the U.S. District Court in San Francisco alleging that San Francisco’s Worker Healthcare Security Ordinance is preempted by ERISA.

According to an article appearing in the San Francisco Examiner, the ordinance requires businesses with 20 employees or more to invest $1.06 to $1.60 for each employee hour worked for health care.

The complaint alleges that “if implemented, the ordinance would intrude both directly and indirectly upon the administration of such [ERISA] plans.” On the other hand, Ken Jacobs, chairman of the UC Berkeley Center for Labor and Research, is quoted as stating that “This law was written very carefully to avoid pre-emption under ERISA . . .”

Jacobs claims that “[t]his law is like the minimum wage law. It sets standards for spending on health care. The law says nothing about the content of the health services, which is what ERISA addresses.”

The preemption issue is a substantial threat, however, as the District Court of Maryland has only this summer struck down legislation aimed at increasing healthcare spending through employer dollars. On July 19, 2006, the District of Maryland ruled that Maryland’s so-called “Wal-Mart law,” was preempted by ERISA.

Under The Fair Share Health-Care Fund Act, Md. Code Ann., Lab. & Empl. § 8.5-101, et seq. (“Fair Share Act”), non-governmental employers of 10,000 or more people that “[do] not spend up to 8% of the total wages paid to employees in the state on health insurance costs, shall pay to the Secretary an amount equal to the difference between what the employer spends for health insurance costs, and an amount equal to 8% of the total wages paid to employees in the State.” See, Retail Leader Associate v. Fielder, (D. Md. 2006)

The Maryland legislation targeted Wal-Mart in a way distinguishable from the San Francisco ordinance, but it remains to be seen if the financial burden on employer plans may nonetheless find apt analogies in the Fielder decision. (The Fielder decision is reportedly being appealed – see August 2006 Lorman newsletter prepared by McGuire, Woods.)

Presumably, the approach taken by the San Francisco ordinance has been informed by experience gained from observing the fate of the Fair Share initiative in Maryland. For more discussion of the policy driving such legislation, a good resource may be found on The Faculty Law Blog where Saul Levmore provides insight on the Chicago “big-box” retail store ordinance and additional links.

On a related issue, the Los Angeles Times online portal includes an article today, “San Francisco Labor Hails Passage of Sick Leave Measure” (unrelated ordinance):

Cementing its reputation as a progressive haven and further irking business groups, San Francisco has become the first city in the country to mandate paid sick leave for all employees. The ballot measure, which hardly generated discussion here and passed with a resounding 61% of the vote, comes at a time when businesses are reeling from a city plan that requires employers to contribute to universal healthcare and a citywide minimum wage boost phased in over the last few years.

Whatever the outcome of the legal battle in San Francisco, two items are certain -the decision on the ERISA preemption issue in that case will have an impact well beyond its borders – and the City’s “irksome” reputation will undoubtedly stick for some time to come among business groups.

:: Essential Requirements For ERISA Health Plan Subrogation Language

A good subrogration clause will do the following:

1. Disclaim the “make whole” doctrine. Query: While prudent to include such a provision, should this be a requirement after Sereboff? (See, Settling Personal Injury Actions After Sereboff v. Mid-Atlantic)

2. Disclaim responsibility for attorneys’ fees, e.g., the “common fund” doctrine

3. Authorize the pending of claims until accident information is provided

4. Provide a broad definition of sources subject to the provision, including, e.g., uninsured and underinsured motorists’ coverage

5. Provide for recoupment by offset of future claims

Additional provisions should be included that require recovered funds to be held in trust, assign causes of action against at-fault parties in appropriate circumstances and require cooperation in preventing prejudice to the plan’s rights of recovery.

Some recent cases may provide drafting cues, such as the decision in Blue Cross Blue Shield of South Carolina v. Josue Carillo, Vincente Carillo and the companion case United Distributors Inc. Employee Health Benefit Plan, v. Deborah Parrott, where the subrogation provision was approved as follows:

The subrogation and reimbursement provision in the United Distributors Plan claims a lien ‘on any amount recovered by the Covered Person whether or not designated as payment for medical expenses.’ . . . It further clarifies that ‘[t]he Covered Person ··· must repay to the Plan the benefits paid on his or her behalf out of the recovery made from the third party or insurer.’ Id. (emphasis added). Thus, language essentially identical to the Supreme Court’s characterization of the plan language in Sereboff, specifies both the fund (recovery from the third party or insurer) out of which reimbursement is due to the plan and the portion due the plan (benefits paid by the plan on behalf of the defendant). Unlike in Knudson, a significant portion of the funds specified went directly into the Parrotts’ bank account and, thereby, was in their possession for purposes of this case.

Any issues or provisions you believe are worthy of addition to the list should be posted for comment and the review will add to the collective wisdom of our readers.

:: ERISA Plan Information Requests: (Unit 1) “Statutory Purpose and Scope”

ERISA already has an elaborate scheme in place for enabling beneficiaries to learn their rights and obligations at any time, a scheme that is built around reliance on the face of written plan documents. The basis of that scheme is another of ERISA’s core functional requirements, that “[e]very employee benefit plan shall be established and maintained pursuant to a written instrument. ” . . .

In the words of the key congressional report, “[a] written plan is to be required in order that every employee may, on examining the plan documents, determine exactly what his rights and obligations are under the plan.” H.R.Rep. No. 93-1280, p. 297 (1974) U.S. Code Cong. & Admin.News pp. 4639, 5077, 5078 (emphasis added) . . . ERISA gives effect to this “written plan documents” scheme through a comprehensive set of “reporting and disclosure” requirements, see 29 U.S.C. §§ 1021-1031 . . .

Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 115 S.Ct. 1223, (1995)

This series of articles will attempt to add some milestones along the way as the practitioner evaluates the requirements of participant plan information requests under 29 U.S.C. Section 1024(b)(4). The statute, coupled with the possible per diem penalty under Section 1132(c), forms a frequent complement to claims under ERISA and can register a telling financial blow on unwary or intransigent plan administrators.

The Statutory Mandate

The statute states:

The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated. The administrator may make a reasonable charge to cover the cost of furnishing such complete copies. The Secretary may by regulation prescribe the maximum amount which will constitute a reasonable charge under the preceding sentence.

The provision can be analyzed by taking the constituent parts in turn as follows:

1. Is there an ERISA plan?

2. What information is subject to the provision?

3. Who is entitled to request the information and from whom?

4. Under what circumstances may a penalty be appropriate and how should it be calculated?

5. What charges are appropriate for furnishing documents under the provision?

This first article will bypass the question of whether an ERISA plan exists as that issue would take the subject far from the primary focus. The first issue, that of information which is subject to the provision, will be taken in two parts – first an overview, and then a more detailed inventory of cases applying the provision to specific facts.

What Information Is Within The Scope of the Provision?

The legislative history suggest that the provision applies to any “plan documents [necessary to] determine exactly what [a participant's] rights and obligations are under the plan.” While that notion may supply a helpful backdrop for evaluation, the caselaw has been more specific, and arguably, less generous to the participant than implied by the broad directive found in the legislative history.

Certain items are easy to identify as subject to the provision, such as the plan document, the summary plan description,the annual or terminal reports and so forth. The troublesome category lies in the open-ended “other instruments under which the plan is established or operated”.

For example, the Second Circuit Court of Appeals, in a frequently cited opinion, stated that:

These stated goals, i.e., of providing plan participants with more significant information about (1) the plans, (2) their rights and benefits, (3) how those rights could be lost, and (4) transactions by plan fiduciaries, in no way suggest that the information to which plan participants are entitled is unlimited. CWA/ITU Negotiated Pension Board of Trustees of the CWA/ITU Negotiated Pension Plan v. Weinstein, 107 F.3d 139 (2d. Cir. 1997).

Thus, in that case, the Court concluded that ERISA did not require plan administrators to disclose actuarial valuation reports.

Likewise, appraisal or valuation reports of employer’s stock and documents furnished to appraisers were deemed outside of the category of “other instruments under which the plan is established or operated” in Faircloth v. Lundy Packing Co, 91 F.3d 648 (4th Cir. 1996). In the view of the Court, these documents were not used to manage or operate the plan even though it was an ESOP.

Formal Legal Documents As The Touchstone

In effect, the phrase “other instruments under which the plan is established or operated” has been interpreted to mean only formal legal documents governing a plan in most instances. The rationale lies in the statutory construction of the provision applying the hoary legal principle of ejusdem generis:

Barring indicia to the contrary, the broad term, “other instruments,” should be limited to the class of objects that specifically precedes it. See Allinder v. Inter-City Products Corp., 152 F.3d 544, 549 (6th Cir.1998) (applying the interpretive principle of ejusdem generis to the term “other instruments” in Section 1024(b)(4)).

Shaver v. Operating Engineers Local 428 Pension, 332 F.3d 1198 (9th Cir. 2003)

Thus, for most courts, the category of documents subject to the statute must fall in a class akin to formal plan documents or pertaining to plan governance.

In this context, for example, the Seventh Circuit has stated:

Plaintiffs argue that this interpretation of the requirement is too narrow, and that they should have a right to all documents that provide information about a plan and its benefits. We agree with our sister circuits that the latter interpretation would make hash of the statutory language, which on its face refers to a specific set of documents: those under which a plan is established or operated. If it had meant to require production of all documents relevant to a plan, Congress could have said so.

Ames v. American Nat. Can Co.170 F.3d 751 (7th Cir. 1999)

Applying this principle, corporate documents have escaped inclusion in the category of Section 1024(b)(4) governing or operating documents. In Ames, the Court stated that the plan administrator was not required to disclose a sales agreement or the related board resolutions. Likewise, in American Life Holdings, Inc., 190 F.3d 856 (8th Cir. 1999), the Court held that corporate actions replacing members of the Administrative Committee, minutes of Administrative Committee meetings, and written communications with bank evidenced the day-to-day operations of ESOP and were not governing documents.

Conclusion

A number of the decisions in this line of cases produce close questions and frequently leave some doubt as to whether the result conforms with statutory intent. Nonetheless, as stated by the Supreme Court in its evaluation of the reporting and disclosure provisions: “This may not be a foolproof informational scheme, although it is quite thorough.” And then, perhaps resignedly, “Either way, it is the scheme that Congress devised.”

Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 115 S.Ct. 1223, (1995)

>> Next: ERISA Plan Information Requests: (Unit 2) “Statutory Purpose and Scope” >>

:: How To Identify An Exempt Governmental Plan

In providing a general approach to identifying a self-funded ERISA plan, a consideration of plans exempt from ERISA coverage is naturally required. As governmental plans constitute one of the important exemptions from ERISA coverage, this article will address in more detail the prerequisites for exempt governmental plans.

The Statutory Basis For Exemption of Governmental Plans

ERISA defines a governmental plan as follows: The term “governmental plan” means a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term “governmental plan” also includes any plan to which the Railroad Retirement Act of 1935, or 1937 [45 U.S.C.A. § 231 et seq.] applies, and which is financed by contributions required under that Act and any plan of an international organization which is exempt from taxation under the provisions of the International Organizations Immunities Act [22 U.S.C.A. § 288 et seq.]. 29 U.S.C. § 1002(32)

Why Are Governmental Plans Exempt From ERISA?

Before undertaking a discussion of the parameters associated with the exemption, it may be of some interest to note the reason for the exemption in the first place. The purpose of the exemption has been described as follows:

Congress created ERISA “to curb abuses which were rampant in the private pension system.” Roy v. Teachers Ins. and Annuity Ass’n, 878 F.2d 47, 49 (2d Cir.1989) (citing H.R.Rep. No. 533, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Admin.News 4639) (emphasis original). Although applying ERISA to public pension plans was considered, Congress was reluctant to interfere with the administration of public retirement plans due to the resulting federalism implications. H.R.Rep. No. 533, 1974 U.S.Code Cong. & Ad.News at 4647

Hightower v. Texas Hosp. Ass’n, 65 F.3d 443 (5th Cir. 1995).

A Second Circuit Court of Appeals case notes several specific reasons for the exemption:

First, it was generally believed that public plans were more generous than private plans with respect to their vesting provisions. H.R.Rep. No. 533, 1974 U.S.Code Cong. & Ad. News at 4667. Second, it was believed that “the ability of the governmental entities to fulfill their obligations to employees through their taxing powers” was an adequate substitute for both minimum funding standards and plan termination insurance. S.Rep. No. 383, 93d Cong ., 2d Sess., reprinted in, 1974 U.S.Code Cong. & Ad. News 4890, 4965; H.R.Rep. No. 807, 93d Cong., 2d Sess., reprinted in, 1974 U.S.Code Cong. & Ad. News 4670, 4756-57. Finally, there was concern that imposition of the minimum funding and other standards “would entail unacceptable cost implications to governmental entities.” H.R.Rep. No. 807, 1974 U.S.Code Cong. & Ad. News at 4830. See also H.R.Rep. No. 533, 1974 U.S.Code Cong. & Ad. News at 4668.

Rose v. Long Island Railroad Pension Plan, 828 F.2d 910 (2d Cir.1987), cert. denied, 485 U.S. 936, 108 S.Ct. 1112, 99 L.Ed.2d 273 (1988)

As to the principles of federalism noted above, the Second Circuit in Rose quoted the following legislative history:

There are literally thousands of public employee retirement systems operated by towns, counties, authorities and cities in addition to the state and Federal plans. Eligibility, vesting, and funding provisions are at least as diverse as those in the private sector with the added uniqueness added by the legislative process. For this reason the Committee is convinced that additional data and study is necessary before any attempt is made to address the issues of vesting and funding with respect to public plans.H.R.Rep. No. 533, 1974 U.S.Code Cong. & Ad. News at 4647. See also Feinstein v. Lewis, 477 F.Supp. 1256, 1261 (S.D.N.Y.1979) (purpose of ERISA governmental exemption was to “refrain from interfering with the manner in which state and local governments operate employee benefit systems”), aff’d, 622 F.2d 573 (2d Cir.1980).

Factors That Should Not Be Relied Upon

First, as has been noted in a previous article, governmental plans are not required to file Form 5500’s. Nonetheless, one cannot rely upon the absence of filing history as determinative. Some entities file that should not, and other fail to file that should. Second, State statutes and regulations may suggest a plan has governmental status, but inasmuch as ERISA coverage is a federal statute, the scope of the exemption must be determined by federal law. A recent case, McMurtry v. Aetna Life Ins. Co., 2006 WL 2640627 W.D.Okla. (September 13, 2006), provides a good example of this issue. Though the hospital entity in that case was deemed subject to the protections of the Oklahoma Governmental Tort Claims Act, the district court emphasized that that previous finding had no bearing on the ERISA exemption question.

Defining the Governmental Plan: A Framework For Analysis

McMurtry v. Aetna Life Ins. Co., provides an excellent collection of authorities on the exemption and applies the analysis in one of the more typical and challenging contexts – the operation of a regional hospital authority. As noted by the Court in Crosby v. Hosp. Auth., 93 F.3d 1515, 1524 (1996), courts have had difficulty defining the exact nature of hospital authorities. As public purpose authorities, hospital authorities “are unique entities, lying somewhere between a local, general-purpose governing body (such as a city or county) and a corporation.” Thus, the analysis in McMurtry supplies a valuable assessment of the scope of the exemption in the context of a complex organizational framework. The facts were as follows:

1. In 1969, a public trust, Norman Regional Hospital Authority (Authority), took control of the Norman Regional Hospital which was original established by the City in 1946.

2. In 1970, the City of Norman leased the hospital to the Authority.

3. The Authority has also purchased additional land on which additional buildings were built so that a portion of NRH was owned by the City of Norman and leased to the Authority and a portion was owned by the Authority.

4. The City of Norman is the sole beneficiary of the trust. The Trustees of the Authority are appointed by the Mayor of the City of Norman with the approval of the City Council.

The issue before the Court was alleged breach of contract and bad faith which, were the plan an ERISA plan, would be preempted. The district court relied heavily on Seventh Circuit in Shannon v. Shannon, 965 F.2d 542, 547-48 (7th Cir.1992):

The Court finds the test utilized by the Seventh Circuit provides the most appropriate means to resolve the matter. That test relies upon a methodology developed “to determine if a particular entity is a governmental subdivision, agency or instrumentality under the NLRA and the LMRA” Shannon v. Shannon, 965 F.2d 542, 547-48 (7th Cir.1992). The test comprises two prongs, only one of which need be satisfied. The entity is a political subdivision if it is “ either (1) created directly by the state, so as to constitute departments or administrative arms of the government, or (2) administered by individuals who are responsible to public officials or to the general electorate.” Id. at 548, quoting NLRB v. Natural Gas Utility District of Hawkins County, Tennessee, 402 U.S. 600, 604-05 (1971). In applying this test, the courts examine the manner in which the entity was formed, to whom it reports, who has the ultimate control of the entity, how the entity’s employees are paid and whether they are entitled to the protections afforded other governmental employees.

The Court then undertook a factor by factor analysis drawn from the caselaw bearing on the issue. The factors are as follows:

Factor #1: Pedigree of A Governmental Entity- Was the entity created by a public entity? In the McMurtry case, the City created the NRH, so this factor weighed in favor of the exemption.

Factor #2: Public Accountability – To what extent is the management and control of the entity subject to review by public officials? In McMurtry, the Trustees of the managing entity, the Authority, were appointed by the City, and could be removed by the public officials, thus providing “indicia of being a governmental entity”.

Factor #3: The Power of Eminent Domain – The Authority lacked the power of eminent domain which the court noted was important in NLRB v. Natural Gas Utility District of Hawkins County, Tennessee, 402 U.S. 600, 604-05 (1971). (the gas utility district was delegated such authority :”This delegation includes the power of eminent domain, which the District may exercise even against other governmental entities.”)

Factor #4: Records Open To The Public – Are the entity’s records open to the public? Also important in Natural Gas Utility as factor, this was not the case with the Authority.

Factor #5: Employees Covered by Civil Service Protections – Are the entity’s employees subject to civil service protections? The McMurtry court stated: “The employees are not covered by civil service protections, are not hired by the City and are not subject to the same pay scale as City employees. In this regard, NRH is similar to the Truman Medical Center which was found to be a private entity.” citing, Truman Medical Center, Inc., v. NLRB, 641 F.2d 570 (8th Cir.1981)

Factor #6: Separateness of Employees and Their Payroll – May the employee plan participants look to a public source in the event of a shortfall in benefit funding? The Court noted that: “The separateness of the employees and their payroll was an important fact in Brock v. Chicago Zoological Society, 820 F.2d 909, 913 (7th Cir.1987), where the court found the entity to be private.” This factor militated against a finding of governmental status in McMurtry.

Factor #7: Source of Funding – Is public money used to fund the benefits under the plan? On this point, the Court stated: Here, the plan is privately funded, as the premiums for the plan are paid with funding which comes solely from funds earned by NRH. There is no evidence public money is used to fund or support the plan.

Ultimately, the Court determined that the plan would not constitute a governmental plan, stating:

The private nature of the plan in question combined with the fact that employees of NRH are treated more akin to employees of a private entity than a governmental one outweighs the public ownership of the facilities and public accountability of the Trustees. Thus, the Court finds that the plan at issue was not established or maintained for the benefit of employees of a political subdivision, agency, or instrumentality of the State of Oklahoma. Consequently, the plan is not exempted from ERISA by the governmental plan exception.

Not All Factors Are Created Equal

The list of factors set forth above may convey a sense of parity that is not intended. The McMurtry court placed great emphasis on the status of the employees and the source of funding for their benefits. In evaluating these factors, the court observed that:

The Court notes that the fact the plan is not funded with public money and that the employees are more akin to private employees than public are sufficient facts in the Second, Fifth, and D.C. Circuits to preclude application of the “governmental plan” exception. See Roy v. Teachers Ins. & Annuity Ass’n, 878 F.2d 47, 50 (2d Cir.1989); Hightower v. Texas Hosp. Ass’n, 65 F.3d 443, 448 (5th Cir.1995); and Alley v. Resolution Trust Corp., 984 F.2d 1201, 1206 (D.C.Cir.1993).

Once A Governmental, Always A Governmental?

What is the proper result when a plan originally established as a governmental undergoes a change in plan sponsorship? This issue has arisen and received different answers. In a noteworthy case, the Fifth Circuit has held that the plan can lose its governmental status:

The Second Circuit has explained that Congress’ goals in enacting ERISA, coupled with federalism concerns, require that “when a pension plan has been established by a governmental entity for its employees and the governmental entity’s status as employer has not changed, the plan must be exempt from ERISA as a governmental plan.” Roy, 878 F.2d at 50 (emphasis added). It follows that, in order to protect employees of publicly operated pension plans, once a governmental entity relinquishes responsibility for providing a retirement plan to a private entity, that private entity operates or maintains the existing pension plan, or any newly created pension plan, subject to the provisions of ERISA. Hightower v. Texas Hosp. Ass’n, 65 F.3d 443 (5th Cir. 1995)

Note: For further information, the Department of Labor Advisory Opinions offer conclusions on a variety of fact patterns. For example, see ERISA Advisory Opinion 2005-07A, ERISA Advisory Opinion 2004-01A and ERISA Advisory Opinion 2002-11A.

:: Seventh Circuit Approves “Contractually Based Recoupment” As Means Of Overpayment Recovery

[I]n each of the ERISA cases in which the Supreme Court has read § 502 as barring a particular remedy, an ERISA-covered entity has sought judicial relief beyond that specifically authorized by the statute. These decisions, focused on judicial relief, “simply do not address contractual reimbursement schemes such as the one at issue here. Northcutt v. General Motors Hourly-Rate Employees Pension Plan, 2006 WL 3093640 (C.A.7 (Ind.)) (November 2, 2006)

After General Motors suspended the payment of disability and pension plan payments, James Northcutt and Lewis Smith sued GM, the GM Disability Plan and the GM Hourly-Rate Employees Pension Plan, on behalf of themselves and all similarly situated GM plan beneficiaries. Class action proceedings were stayed pending the outcome of the defendant’s summary motion.

The issue arose when GM applied terms applicable to pension and disability benefits under the collective bargaining agreements between GM and the UAW which stated that payments otherwise due to plan participants were to be reduced by an amount equivalent to the federal social security benefits to which the employee was entitled. The plaintiffs alleged that ERISA § 502 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1132, prohibits GM from invoking contractual remedies for reimbursement and required GM to seek equitable relief before a court.

After the district court granted summary judgment for GM, the plaintiffs appealed. Thus, the issue before the Seventh Circuit was whether ERISA § 502 precluded enforcement of the recoupment provisions or permitted such extra-judicial remedies.

The Plaintiffs’ Argument: Recoupment Constitutes Unauthorized Remedy Under ERISA § 502(a)(3)

The plaintiffs argument on appeal may be recapitulated as follows::

1. ERISA § 502 establishes a single, comprehensive remedial scheme by which the plans may recover payments to beneficiaries.
2. Under Great-West Life & Annuity Insurance v. Knudson, 534 U.S. 204 (2002), § 502(a)(3) provides the only mechanism through which ERISA-covered entities may obtain reimbursement
3. Therefore, GM’s contractual reimbursement mechanism, providing for recoupment of unreimbursed overpayments by withholding of future benefit payments is the equivalent to obtaining the “legal relief” not permitted under Great-West.

The key to the plaintiffs’ argument is found in the view that a withholding of benefit payments through offset is the equivalent to enforcing a claim for reimbursement which, on the plaintiffs’ view, implicated ERISA’s civil enforcement scheme.

Seventh Circuit: Contractually-Based Recoupment Provisons Do Not Implicate ERISA § 502(a)(3)

The Seventh Circuit had little difficulty finding that ERISA’s civil enforcement scheme did not prohibit enforcement of the recoupment provisions.

We cannot accept the argument that the contractual reimbursement arrangement at issue here is simply an elliptical arrangement to evade the strictures of § 502 and afford “legal relief” to GM that is not permitted by the statute. Nothing in Great-West or in the Supreme Court’s more recent clarification of judicial remedies in Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869 (2006), compels or even supports the conclusion that the contractual provision before us constitutes judicial relief. Here, the plaintiffs and GM have ongoing performance obligations under the contract. GM simply conformed its future performance with the language of the contracts permitting suspension of benefits. GM has taken benefits otherwise due to the plaintiffs, and applied them to the substantial debt that the plaintiffs owe the plan. This ‘relief’ hardly constitutes, in the absence of any invocation of any judicial civil remedy, ‘legal relief’ as that term is employed in § 502.

The Court noted that challenges to the enforceability of similar reimbursement provisions where plaintiffs have contended that contractually based recoupment amounts to a breach of fiduciary duty by the plan or to a violation of ERISA’s anti-assignment provisions. Nonetheless, the district courts, observed the Court, “appear to have rejected each theory and approved, either explicitly or implicitly, of contractually based recoupment.”

Viewing the plaintiffs’ interpretation of the Supreme Court’s ERISA enforcement precedent “far too expansive[]“, the Court stated that, in each of the ERISA cases in which the Supreme Court has read § 502 as barring a particular remedy, an ERISA-covered entity has sought judicial relief beyond that specifically authorized by the statute. These decisions, focused on judicial relief, “simply do not address contractual reimbursement schemes such as the one at issue here.”

Note: The Seventh Circuit decision noted that briefs were filed in Northcutt before the United States Supreme Court decision in Sereboff was handed down. The view in that case that an equitable lien arose by operation of contractual terms in the plan may have bolstered the Court’s conviction in its conclusion.

The Northcutt Court saw the plan’s right to reimbursement of overpayments as protective of the plan fund and supportive of the “written integrity” of the plan. In the Court’s view, the overpayment recoupment does not constitute a “judicial action” and thus is more in the nature of a claims adjudication.

In Militello v. Central States, Southeast and Southwest Pension Fund, 360 F.3d 681 (7th Cir.2004), the Seventh Circuit had previously affirmed a district court decision permitting suspension of pension benefit payments, applying a claims review mechanism. The Northcutt opinion did not refer to Militello and is silent as to the claims procedure aspect of recoupments.

Northcutt has implications beyond the overpayment context. For example, if a group health plan contains a recoupment provision, Northcutt suggests that the plan may in a proper case offset benefit payments without the need to seek reimbursement of funds through judicial action. This result, however, would depend on inclusion of appropriate plan language, and presumably procedural safeguards for review of benefit denials.

Analogous cases cited by Northcutt include:

• Bush v. Metropolitan Life Ins. Co., 656 F.2d 231, 232 (6th Cir.1981) (affirming the opinion of the district court, which noted that although the contract as written provided a windfall to a beneficiary receiving delayed SSDIB, the plan “could have protected itself by explicitly adding a recoupment provision [that deducted reimbursed costs over several months] to the contract to cover such circumstances”)

• Calloway v. Pac. Gas & Elec. Co., 800 F.Supp. 1444 (E.D.Tex.1992) (determining that the correct legal interpretation of a particular plan contract permitted such recoupment and therefore plaintiff beneficiaries were entitled to no relief under § 502)

• Stuart v. Metropolitan Life Ins. Co., 664 F.Supp. 619 (D.Me.1987) ( aff’d, 849 F.2d 1534 (1st Cir.1988) (per curiam)) (determining that similar recoupment arrangement is neither a breach of fiduciary duties nor a breach of the anti-assignment provisions of ERISA, and that it applies to retroactive payments of SSDIB benefits even though its language does not include the term “retroactive”).

For more on judicial actions to recover overpayments, see Plan Fiduciary Claims For Overpayments, Post-Sereboff.

:: Tenth Circuit Rejects “Make Whole” Relief Under ERISA Section 502(a)(3)

The Linds fall in a long and growing line of plaintiffs who find themselves squeezed between the broad preemptive sweep of ERISA and narrow construction of remedies under the Act itself. We find that the Linds have viable claims neither inside ERISA nor outside it, and we AFFIRM the district court’s grant of summary judgement and denial of leave to amend the claim. Lind v. Aetna Health, Inc., 2006 WL 3072606 (C.A.10 (Okla.)) (October 31, 2006)

Joining the Second and Fourth Circuit Courts of Appeal, the Tenth Circuit Court of Appeals rejected an interpretation of Section 502(a)(3) that would allow some form of “make whole” relief against plan fiduciaries. Lind v. Aetna Health, Inc., 2006 WL 3072606 (C.A.10 (Okla.)) (October 31, 2006)

James D. Lind, after experiencing recurrent and severe headaches, dizziness, and depression, was diagnosed with multiple sclerosis. Lind had health coverage though his wife’s plan with Aetna.

Aetna referred Lind to Dr. Jorge Gonzalez, a neurologist, for treatment. Dr. Gonzalez prescribed a three-drug regime which successfully reversed the symptoms, and this treatment succeeded allowing Lind to return to work.

Sixth months later, upon going to the pharmacy to renew his prescription, Lind learned that Aetna had not authorized any further renewals. Over the vigorous objections of his own physician, Aetna informed Lind and his physician that Lind must first try Ritalin, a “step drug,” before the company would authorize payment of the prescribed treatment.

The new approach failed, the original symptoms recurred immediately, and Lind could no longer work. Aetna re-authorized payment for Lind’s medications, but the new symptoms proved irreversible, and Lind was as a result permanently disabled. Read more

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